Startups may have to rethink IPO strategy after Paytm’s market debacle

Last Updated on January 22, 2023 by Admin

[ad_1]



A stunning two-day plunge by India’s after its initial public offering casts a shadow over the prospects for technology firms preparing to go public in what was supposed to be the country’s breakout year.


At least some of the IPO prospects that have been “on the periphery” and looking to benefit from the flood of transactions may now rethink the timing and pricing of their issues, according to Edelweiss Financial Services Ltd. Payment services firm may delay its IPO by a few months due to lack of demand from investors and a 30%-40% drop in valuation, the Economic Times reported Tuesday citing sources it didn’t identify.





The debacle has dimmed the mood in India’s stock market with its benchmark S&P BSE Sensex Index dropping four sessions in a row, the longest losing streak in a month. Retail investors, who bought an unprecedented amount of shares in Paytm’s parent One 97 Communications Ltd., have seen 37% of their value wiped out in just two trading days. Further losses may be in store if the stock slumps from its Monday closing price of 1,359.6 rupees to the 1,200 rupees predicted by Macquarie Group Ltd.


“The event in a way will nudge people to be cautious and not take the market for granted by blindly placing bets,” said Gopal Agrawal, managing director and co-head of investment banking at Edelweiss Financial Services. “It is important that a company’s story and prospects are well understood by investors.”


India’s equity markets had been on a tear this year, buoyed by a central bank that slashed interest rates to a record low and millions of new individual investors seeking higher returns in riskier assets. The rally has encouraged at least half-a-dozen technology startups to seek to public listings, including SoftBank Group Corp.-backed Oyo Hotels & Homes and logistics provider Delhivery Pvt.


Firms in the South Asian nation have raised about $15 billion through IPOs this year, already an annual record by total proceeds. Yet critics have been questioning valuations on some of these IPOs, given they are still loss-making


Paytm Bloomberg graph


Bloomberg


“The pandemic led to huge technology adoption in the country that got priced into the valuations of many technology companies,” said Ashutosh Sharma, vice president and research director at Forrester Research Inc. “Is this the beginning of a downward trend? I don’t know. But going forward, investors will look cautiously on the risks and business future of tech


Paytm’s valuation, at about 26 times estimated price-to-sales for the financial year 2023, is expensive especially when profitability remains elusive for a long time, Suresh Ganapathy and Param Subramanian of Macquarie Capital Securities (India) Pvt. wrote in one of the few research reports covering Paytm’s prospects. Most fintech players globally trade around 0.3-0.5 times price-to-sales growth ratio, they said.


What Bloomberg Intelligence says:


“Domestic mutual-fund inflows of $1.2 billion in October and record-high participation via systematic investment plans underscore India’s structural trend of savings shifting to equities. In contrast, FII selling has gained pace with outflows of $2.3 billion in October, the highest monthly outflow since the onset of the pandemic.”


— analysts Gaurav Patankar and Nitin Chanduka wrote in note published Tuesday


Paytm’s large IPO size also restricted demand, which could bode well for smaller prospective IPOs. Food delivery app Zomato Ltd. and beauty startup Nykaa — both smaller than Paytm’s offering — have seen their shares surge more than 80% since their IPOs.


Edelweiss’s Agrawal suggests pricing share sales to “leave something on the table for investors.”


“If an issue could be priced 10% higher or lower, it will be advisable to go with a lower pricing, which offers a much bigger upside when it comes to trade,” he said.


(With assistance from Filipe Pacheco.)

mail Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor



[ad_2]

Source link