The story of Paytm is very unique. From the last few quarters, the revenue of the company is rising. But the share price of the company is declining sharply. After its listing, the company’s share price has fallen by 70%.
After that some people have been saying buy on dip. Which means since the share prices have dropped, we must buy them. Whereas some analysts are saying that the company doesn’t have a business model at all.
So, today we will talk about the rise and fall of Paytm. And find out where exactly did the things go wrong.
Decoding Paytm Profitable Business
We earlier discussed in this article that currently, only two things are working in favour of Paytm. First is Fastag and the second is Paytm payments Bank. And importantly, this fastag also comes under the Paytm Payments Bank.
And in Fastag, the Paytm has 28% market share. The Paytm Payments Bank is the only entity which is profitable. In the financial year 2020, the Paytm earned a profit of Rs 29 Crores. Which, by the FY 2021 increased to Rs 37 Crores.
But somewhere, it is also being seen here that perhaps the Paytm Payments bank is taking the RBI regulations casually. And therefore it is facing different bans for on-boarding new customers.
Paytm Bank Violating RBI Rules
In the year 2016, Paytm got the license for the payments bank. And in 2017, Paytm Payments Bank became operational. And in 2018, it was the first time that the RBI banned the Paytm Payments bank from on-boarding new customers.
Because they found some KYC related lapses in procedures. In some time, the Paytm resolved those issues. After that, within 6 months, they were permitted to onboard those customers. And now in 2022, RBI has again banned the Paytm Payments bank for on-boarding new customers.
After this, the company’s share price has dropped by more than 20%.
Real truth of Paytm fall
Now the question comes, is Paytm Payment bank the reason for the fall in the share prices. Absolutely not. The main reason behind the fall of share prices of Paytm it has got nothing to do with the Paytm business.
In my opinion, its not the rise and fall of Paytm’s business. But it is the rise and fall of the Paytm’s valuation. But in this game of valuation, somewhere the image of the Paytm and the investors have suffered a big setback.
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A lot of talks are going on about the share prices of the Paytm. that these people are not able to run the business properly. They don’t have a clear business plan in place.
They have done too much diversification. But these are not the reasons behind the fall of the Paytm. So, before understanding the main reason, we will have to understand the valuation of the Paytm at its IPO time. And we will also have to understand that
why did this happen?
Why was the valuation kept so high?
At the time of its IPO, Paytm valuation was Rs 1.39 lac crores. But there were no profits in the company, they company was making losses. And the revenue of the company was around Rs 3300 Crore. It means that you cannot calculate the price to earning ratio because the company is loss-making.
So we will have to calculate the price to sales ratio. Which is coming over 35. Normally, the companies do not have such big price to earning ratio But they have this much price to sales ratio.
Although the company was incurring big losses here. Still, let us assume that the company gets a 10% profit. Which will give us a figure of Rs 300 Crore. If you calculate the price to earning ratio as per the Rs 300 Crore profit, it comes to more than 400.
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It means that if you want to recover your money from this company, the company will have to grow every year by 400%. And every body knows, it is not possible.
Because in the last two years also, the company’s revenue has grown by 0%. In such a scenario, the annual profit growing by 400% was just not possible.
How investors trapped in Paytm
Let us first understand how did the investors get trapped in these IPOs. Last year, that is in 2021, 65 IPOs were launched. That is, we can say that the last year was a bumper year for the IPOs. And it is not that the IPOs were bad.
I am showing you some returns which might surprise you. Out of these 65 IPOs, 10 IPOs have given more than 100% returns. So assume that if you invested in all the IPOs, and also assume that you get the allotment in all the IPOs, then you would have received returns worth 2000%.
Which is quite amazing in itself. Here some companies even gave more than 200% returns.
Like Paras Defence gave returns of 268%, MTR technologies have given a return of 245%, Laxmi Organic-221%, Nureca-251%. If you are getting such good returns from the IPOs who would not invest in IPOs?
If we look at the last year IPOs in which the investors have incurred maximum losses, Number one among them is Paytm. Wherein the investors had a loss of 70%. And the second was Car Trade in which there was a loss of 64%.
Now there is something common in both these companies. The common thing between both these companies is both of them are start ups, both are loss-making, And both of them got listed at a high valuation on the stock exchange.
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If you pay attention to the private market like OLA, OYO, BYJUs, Unacademy. If you look at the valuation of these big start ups, you will be left amazed. Because in the private market also there has been this practice of having such heavy valuations, without any profits.
Even if a company does not have profits or if it has a small profit, even then their valuation will be in several billion dollars. But this valuation bubble started getting burst from the year 2019.
In 2019, the UBER launched its IPO in the USA. And the price of this IPO was 45$. Today, it has been 3 years after the coming of UBER IPO. And today, the company’s share price is 32$. Which has gone down by 28%.
It means that the kind of valuations that the UBER got in the private market, it could not sustain that in the public markets. So, it means that high valuations of the private market are somewhere unable to meet the reality. And this is not a single example.
In the case of Weaver also, we got to see the same thing in the US. And speaking of India, after the stock price fall of Paytm and Car trade, Around 30 start ups have either put their IPOs on hold, or have postponed them.
Some startups like OYO have halved the size of their IPO. Speaking of the business of Paytm, in the last 3-4 years, Paytm business has been growing very slow. And Mr Vijay Shekhar Sharma had defined his business like, that our business model is not a coin business model.
We acquire customer for A and then A makes some money, while more money is made on a derivative of A. Which are B,C,D and then there is an opportunity of E,F,G.
After explaining his business model, almost nobody could understand this business model. And now even when the business is also growing very slow, there is nothing wrong about it.
But inspite of having a low business, if you keep a valuation like this, and on top of that, the Paytm CFO states that we could keep an even higher IPO price. But we wanted to keep some value for the investors.
That’s why we launched the Paytm IPO at a lesser value. After hearing such statements, people ridiculed them at that time. and they are laughing today as well. But the learning for everyone is that without looking at the valuation, Following a herd-mentality, you cannot invest in any company. The understanding of valuation is the most important factor.