Clearly valuations have been a concern with Paytm ever since the IPO pricing came out; but the question in the near term is would you be willing to buy it at 10% lower than the discount it has already listed at? At what price would you be comfortable buying into Paytm?
Let us rewind back to 2000 when a set of newbie investors came to the market who were tech savvy, who believed more in their dreams and less in financials. Now, 20 years later, the newbie set of investors are back in the market again; never mind the financials, they believe more in the dreams and I think they are going to learn a lesson of a lifetime in investing.
The lesson is this; if you buy something at a wrong price, that bad decision hounds you for a very long time. My favourite example is Microsoft. It was a great company in 2000. If you bought it at $60 dollars in 2000, you had to wait about 16 years till 2016 to just break even. In that context, if Paytm at 20 billion is saying that I am 65% of Axis Bank, 40% of Kotak Bank, 30% of ICICI Bank and 20% of HDFC Bank, I really do not believe it is even remotely possible.
Let us just look at a couple of quick pointers here; they want to be this super app, but even after seven, eight years into existence, they have hardly made any dent into brokerages, in banking space. I agree the payment bank is a limiting factor, but the average balance in a payment bank account is just about Rs 500; do what you want to do with that. They have hardly made any dent in the lending space. I can buy dreams but there is only so much that I can pay for it.
Finally, technology is a very fast changing space. A tech company can disrupt itself and also get disrupted. After demonetisation, Paytm was the first brand recall and it really disrupted but UPI disrupted it back again. Today we have a winner takes all kind of a market. The internet space people do not remember anything more than the first two players and 80% of the UPI market is dominated by PhonePe and Google Pay. They have deep pockets. I do not know with 12% market share how does Paytm bounce back from there?
Putting all of this in context, if you are not a market leader in any of these places, I really find it very difficult to believe how Paytm can bounce back from here. This kind of valuation really is financial insanity. I would not even be comfortable at less than 50% discount to the current price because I do not really see a path to Paytm’s market domination and the kind of dreams that are being propelled. Keep in mind that it is five years after demonetisation that we are talking about all of this.
What if Paytm decides that to make big changes? Their total cost of acquiring customers has come down, the total advertising spend has come down. What happens if in the next two years Paytm gives a very clear path to profitability?
There are the other players — PolicyBazaar, Nykaa. All of them have certain common dimensions. They are all trying to position themselves at about 45 times sales. History tells us that at 45 times sales, it is very hard to make money from this point. To your point of they can try and be all of this, maybe they can! I am not saying that Paytm cannot – with due credit to the entrepreneurship spirit in India, people have put in the hard work.
The only limited point is the whole idea of VCs coming in was that they give a path to profitability to the company and then they let the market decide the price and take it on from there. Here 10 years down the line, the company is still making losses and VCs are giving the company back to the market.
Very interestingly, all the three companies show one common trend. In the final year suddenly I see FY21 the promotional spends dropped very sharply. So promotional spends were 95% of sales in FY19 for Paytm. They dropped to something like 40% of sales in FY20, FY21 they are just about 25-20% of sales. I do not know how this is sustainable. Of course, coming to the IPO, there is some bit of window dressing but I really do not see a positive gross margin also in the company.
I compare it with PayPal which is operating at 45% gross margins in the US market and at 20% net margins. Paytm is not even positive on gross margins, how do you come back from there?
