The largest initial public offering in Indian history, Paytm (NSE:PAYTM), has fallen on its face.
True, the digital payments app priced at the top end of its range, at 2,150 rupees. However, it plunged on its first day of trading, closing at 1,564 rupees on Thursday with a 27% loss.
Paytm has time to lick its wounds over the weekend. Indian markets are closed on Friday for the Guru Nanak Jayanti, a holiday celebrating the birth of the first Sikh guru, Guru Nanak.
Indian stocks are Asia's top performers. The BSE Sensex has run up 36.8% in the last year and the Nifty 50 has fared even better, advancing 39.1%.
So you'd expect great things out of a tech IPO, particularly such a high-profile one. The company is backed by some of the region's savviest tech investors, with hefty stakes held by the Softbank (SFTBY) Vision Fund, the world's largest tech-focused venture capital fund, and the Alibaba Group Holding (BABA) spinoff Ant Group. Berkshire Hathaway (BRK.B) also owns a small stake equal to 2.4% after the IPO.
Paytm priced its shares last Friday to max out the 2,080-2,150 indicative range. That means the stock offering of 85.1 million shares was valued at 183 billion rupees (US$2.46 billion).
That's more money than any Indian company has raised on its debut. The company, previously called One 97 Communications, raised US$1.1 billion from anchor investors, which include BlackRock (BLK) , the Singapore sovereign wealth fund GIC and the Canada Pension Plan Investment Board. "Regular" investors bid US$2.6 billion on the remaining US$1.4 billion of shares on offer.
Interestingly, the institutional portion saw greater demand, subscribed 2.79 times, than the retail portion, subscribed 1.66 times the shares on offer. It's unusual to see a tech offering glossed over by retail investors, who are normally desperate to get their hands on shares. The institutional investors are more likely to sit on their shares, while the anchors have lockups.
We have seen massive oversubscriptions for other tech offerings in Asia. When video-sharing app Kuaishou Technology (HK:1024) went public in February in Hong Kong, the portion sold to retail investors was oversubscribed by 1,200 times the shares on offer.
The US$6.2 billion offering from Kuaishou, which is backed by Tencent Holdings (TCTZF) , is the largest in the world so far this year. But a first-day bounce is no guarantee of long-term outperformance. Although Kuaishou shares raced up 160% on the first day of trading, they are down 68% since then.
Paytm ranks around ninth in terms of size for IPOs globally this year, similar in size to the listing in February of dating app Bumble (BMBL) . Bumble shares have also plunged this month, leaving the company looking at a 46% year-to-date loss.
The original investors in Paytm took the opportunity to take some money off the table with the IPO. Ant sold down its stake from 28% to 23%, generating US$633 million, while Softbank cut its holding to 18.5% from 26%, with proceeds of US$227 million. Berkshire Hathaway has already turned an US$11.2 million profit by selling 1.4 million shares after buying 17 million shares for US$300 million in 2018. The rest of its shares are all gravy.
An IPO exception
Other tech offerings have leapt on debut in India, which has encouraged entrepreneurs to look to list. Indian companies are currently not allowed to go public directly in overseas markets, although regulators are considering a change in that rule.
Food-delivery app Zomato (BSE) zoomed ahead 65.6% on its debut on July 23. Just this month, FSN E-Commerce Ventures (NSE:NYKAA) nearly doubled on its first day of trading. The company, which saw its shares close up 96% on its Nov. 10 debut, runs the cosmetics and fashion site Nykaa.
Most recently, the debut on Monday of PB Fintech (NSE:POLICYBZR), which operates the online insurance site Policybazaar and the quick-credit site Paisabazaar, ended its IPO day with a 22.7% gain.
I'm of two minds about first-day stock gains. Yes, a stellar showing shows strong demand for the company's shares. But a rip-roaring debut also shows that the investment banks totally mispriced demand and the company left tons of money on the table that it could have used for its own growth.
A perfectly priced IPO would end the first day flat. That would be a huge success in economic terms, but the headline writers would have a field day that the offering "fell flat."
The takeaways from the Paytm offering are that it was particularly large and priced expensively to maximize the amount the company takes away. It will have given rival MobiKwik and the hotel operator Oyo food for thought about their coming IPOs.
Competing in a tough space
However, there are serious concerns about Paytm's prospects. It faces stiff competition from around 30 payment apps and e-wallets in India. They include PhonePE, a competing app from Flipkart, which is 82% owned by Walmart (WMT) . Google Pay offers a similar service operated by Alphabet (GOOGL) , as does Amazon Pay from Amazon.com (AMZN) .
Macquarie Capital's India arm put out a damning client note on Paytm with an underperform rating, saying the "cash guzzler" company's business model lacks "focus and direction."
Paytm is losing money, with a US$51.5 million loss in the June quarter that was 34.5% larger than the same period last year, and analysts are unsure how soon that will change. The situation would shift if Paytm were to win a lending license, but that prospect is remote. If anything, it faces policy risk that the central Reserve Bank of India might impose online finance regulation to its detriment.
Paytm does have a banking license, which allows it to offer current and savings accounts, online banking and debit cards. However, it cannot make loans or issue credit cards.
Engineer Vijay Shekhar Sharma founded Paytm in 2010 and the company got a big boost when Uber Technologies (UBER) and the Indian railway system qualified it as a payment option in India. Usage also got a huge nudge in November 2016 when India declared 86% of the country's cash in circulation worthless, forcing people to return the notes to the bank if they wanted to get anything back.
Sharma is now worth US$2.2 billion, according to the Forbes real-time ranking. That's good for No. 92 on India's rich list. He generated US$54 million by selling 1.9 million shares in the IPO. He still owns 12% of the company after the stock offering.
It has been a very different story for tech stocks in Asia this year compared with the record highs set by the Nasdaq. The ICE Asia Tech Index, which consists of 30 of the biggest, most-popular tech names in East Asia, is down 9% in 2021. The Nasdaq composite is up 26% this year.
In India, the S&P BSE Information Technology index has advanced 43.5% so far in 2021. But there are plenty of signs that investors into India are growing concerned about peaking valuations. Recent trading has been choppy and is bouncing around without breaking new ground from its levels at the start of September. The strongest gains came in the first quarter.