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The much-awaited IPO of One97 Communications, the holding company that owns and operates the PayTM super app and other allied businesses, is opening November 8, 2021. The offer worth ₹18,300 crore, comprises a fresh issue of ₹8,300 crore and the rest being offer for sale. Founder promoter Vijay Shekar Sharma, along with other marquee investors such as Antfin (Netherlands), Alibaba.com Singapore E-Commerce and BH International Holdings are selling partial stakes in the IPO. 

The IPO is the biggest-ever for the Indian capital markets, and eclipses Coal India’s then mammoth offer. This is also the costliest mainboard IPO in terms of share price by virtue of the Rs 2,080-2,150 per share tag, that surpasses the record held by Dix Technologies (₹1766 per equity share). Should you invest in One97 Communications (PayTM) IPO and will it make money for you? We help you find answers.

About the company

One97 Communications Limited was incorporated on December 22, 2000. The company today is India’s leading digital ecosystem for consumers and merchants. Paytm offers ‘Payment Services’, ‘Commerce and Cloud Services’, and ‘Financial Services’ to 33.3 crore consumers and over 2.18 crore merchants registered with them, as of June 30, 2021. Theirs is a 2-sided (consumer and merchant) ecosystem. One97 Communications launched Paytm in 2009, as a “mobile-first” digital payments platform to enable cashless payments for Indians, giving them the power to make payments from their mobile phones. 
Starting with bill payments and mobile top-ups as the first use cases, and Paytm Wallet as the first Paytm Payment Instrument, they have built the largest payments platform in India based on the number of consumers, number of merchants, number of transactions and revenue as of March 31, 2021.
Paytm is available across the country with “Paytm karo” (i.e. “use Paytm”) evolving into a verb for hundreds of millions of Indian consumers, shopkeepers, merchants and small businesses.
The “Paytm” brand is one of India’s most valuable payments brands, with a value of $ 6.3 billion.
Besides, One97 Communications subsidiaries has made PayTM a payments-led super-app, through which they offer their consumers innovative and intuitive digital products and services. Paytm Payment Instruments allow consumers to use digital wallets, sub-wallets, bank accounts,buy-now-pay-later and wealth management accounts. 
Paytm is the only payments company in India that, together with their affiliates, owns each layer of the payment stack. It offer services such as Paytm Wallet, Paytm QR, Paytm Soundbox, Gold investments and Fixed Deposit, Paytm Postpaid, Merchant Cash Advance and FASTag. 

The hype and realities

The excitement around the IPO of PayTM is purely a play on the current under penetration of digital payments in the country and the leadership position that the company enjoys. 
Put together, One97 Communications subsidiaries has 32 subsidiaries (includes PayTM Money and 17 foreign subsidiaries), 10 associate companies (includes PayTM Payments Bank) and other joint ventures.
One97/PayTM generates revenue in the form of transaction fee, consumer convenience fee, and recurring subscription fee (from merchants), payment services. That’s one of the biggest moneyspinners for it.
Software and cloud services accounts for 14 per cent of revenue in FY21. 
The company’s Gross Merchandise Value (or GMV) grew by 33 per cent CAGR over FY19-21 to ₹4 lakh crore.
For FY21, One97 Communications reported a revenue base of ₹3187 crore and loss of ₹1701 crore compared to revenue of ₹3540 crore in FY20 and loss of ₹2942 crore. 
Despite steady growth in merchant on-boarding and transaction volumes (GMV), its operating revenues dropped 7 per cent CAGR over FY19-21 to ₹2,802 crore. This implies an average take rate of 0.69 per cent, which further dropped to 0.61 per cent in June 2021 quarter.
Do note the take rate for the company is low and may remain so even going ahead. The RBI has restricted the transaction fees and commissions on various payment services to less than 1 per cent (varying across payment instruments), apart from imposing per transaction limits on such fee income (in the range of ₹15 to ₹1,000). 
PayTM faces tremendous competition from large players such as Google, Walmart-Flipkart/PhonePe and Reliance-Facebook. Besides there are numerous other fintech players it competes with in each separate segment.
The company also has no profits in the past to show. Its EBITDA (loss) margin, improved from negative 130 per cent in FY19 to negative 59 per cent in FY21. 
The company is sitting on a cash (and bank) balance of ₹2,498 crore (pre-issue) as of June 2021 and could heopefully get another ₹8,300 crore through the IPO. That’s a total of ₹10,800 crore. 
Do note that PayTM around June-July 2021 saw a series of exits from KMP such as Amit Nayyar, Rohit Thakur, Jaskaran Singh Kapany and Amit Veer. 

To invest or not

Translating revenues to profits has ben a tall task for PayTM. 
While you can bet big on the under penetration of digital transactions and financial services in the country, PayTM is present in everything. That casts the net wide, but thin. Given its ambitions and vision, the path to profitability is 18-24 months but that can change based on how the businesses run. At a price band of ₹2,080-2,150 apiece, the company is valued at EV/revenue (FY21) of 40.3 times compared to its profitable foreign listed peers that trade in the range of 7 to 12 times. We consider players such as Paypal, Square, and Ant Financial as peers of One97 Communications (PayTM). The price tag of the IPO leaves little on the table for investors. Even for IPO investors who aim for listing gains, the large size of the IPO means the oversubscription numbers will be, at best, modest.
Recent tech IPOs such as Nazara Tech. (EV/sales of 8 times), Zomato (EV/operating sales of 29 times) and FSN Commerce or Nykaa (EV/sales of 22 times) were not priced as aggressively as Paytm. So, risk reward ratio could be less favourable for investors who buy at this PayTM IPO price. 

Brokers views

Ashika: Leveraging the large scale, reach, and deep and high-frequency engagement by consumers and merchants on the payments platforms, it has been able to add new payments offerings, as well as expand into commerce and cloud services and financial services. Each of its offerings increases the scope of the ecosystem for consumers and merchants, enhancing the value of the ecosystem. There is a large opportunity for Paytm to leverage the technology infrastructure and expand to international markets. In 2017, Paytm piloted the bill payment services in Canada and in 2018, Paytm partnered with Softbank Corp. and Yahoo Japan Corporation to launch PayPay, a leading digital payments and financial services company in Japan. 
Axis Capital: India is a country of hundreds of millions of young and aspiring consumers who are underserved in payments and financial services products. There are millions of small businesses in India that would benefit from having increased access to affordable software, technology and financial services. These consumers and small businesses can be served through technology-led, digital-first commerce. Paytm has a large addressable market in India. The market segments that they serve have large growth potential, due to significant under-penetration, and the ability of technology to grow the market. 

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