What Paytm’s listing flop show tells us about IPO success stories

Outside the Eco-Chamber

Paytm’s initial public offering is the biggest IPO that the country has ever seen. Yet, unlike the IPOs of other unicorns -- start-ups that are valued at more than a billion dollars -- investors somehow didn’t buy Paytm’s story. What went wrong with Paytm?

The investors who invested in Paytm’s IPO were allotted shares at a price of Rs 2,150 per share. On Thursday, when the stock was listed, its price fell and closed the day at Rs 1,564.2, or 27 per cent down from its allocation price.

What this means is that investors who were allotted shares in the IPO and were still holding on to them as of Thursday had already seen the value of their investment fall by more than a quarter.

Why did this happen? There is a simple answer and a complicated answer.

Paytm’s IPO was oversubscribed 1.89 times. When it comes to retail investors or investors who had bid for shares up to Rs 2 lakh, the oversubscription was 1.66 times. This means, for every 100 shares on offer, investors bid for 166 shares.

For non-institutional investors, which primarily includes high net-worth individuals (HNIs), or essentially individuals who bid for shares worth more than Rs 2 lakh in an IPO, the issue was subscribed just 0.24 times. This means that for every 100 shares on offer, these investors bid for only 24 shares.

Many retail investors and HNIs look to sell out on a stock’s listing day and make some money. A stock’s price goes up on listing day if it is massively oversubscribed and investors who did not get any allocation in the IPO are looking to buy it. The demand for the stock pushes up its price and those selling it make money.

In Paytm’s case, the retail portion was barely oversubscribed, but worse, the HNIs hardly bought the stock at all. So, those who were looking to sell out their IPO allocation on listing day didn’t find buyers. The stock price fell.

Also read: Muted debut for Paytm on D-street

This was the simple part of the story. Now for the more complicated part, or why Paytm’s story did not catch investors’ fancy as Zomato, Nykaa and Policybazaar did.

Let’s start with Zomato. The IPO was oversubscribed more than 38 times. So, for every one share on sale, bids were made for 38 shares. The retail portion of the IPO was oversubscribed 7.5 times. Nykaa was oversubscribed close to 82 times, with the retail portion being oversubscribed by more than 12 times. Policybazaar was oversubscribed close to 17 times, with the retail portion being oversubscribed more than three times. The demand from HNIs was very high for each of these three companies.

Further, institutional investors like mutual funds, insurance companies and other financial institutions wanted to buy these stocks at any cost. This can be gauged from the fact that the oversubscription in this category in case of Zomato, Nykaa and Policybazaar were 52 times, 91 times and 25 times, respectively.

Hence, on the day, when these stocks listed, there was a huge demand for them and their prices went up, leading to listing day gains.

As already explained, the demand for the Paytm stock among investors was very low. In fact, the institutional portion of the stock was oversubscribed just 2.8 times.

What this means is that investors bought the stories of the other unicorns, they simply didn’t buy the Paytm story. Or, to put it in simpler terms, it is very clear what the business models of these companies are. Zomato is primarily a platform that brings together restaurants and those who want to order food online. In the process, it hopes to make some money. Nykaa is the Amazon of makeup, beauty and skincare. Policybazaar sells all kinds of insurance. The elevator pitch of these stocks is straightforward.

That cannot be said of Paytm. The company captured the imagination of the people by advertising aggressively post-demonetisation as a payment app. The trouble now is that there is way too much competition in the payments space and the government’s united payment interface (UPI) has in a way neutralised Paytm’s first-mover advantage.

Also, if you log on to the website or the app now, it’s absolutely all over the place. The company is into selling insurance, giving personal loans, helping you pay bills, booking tickets of all kinds, from cinemas to bus journeys, and even helping you invest in stocks.

So, the investors don’t know what the company really stands for. Or, what exactly is its business model? Or, as Vijay Shekar Sharma, Paytm’s founder, told CNBC-TV18 after the stock’s listing: “People will take time to understand the business model.”

The question is, why is the focus of other companies important and why is Paytm’s being all over the place hurting it. In the platform business, in which the likes of Paytm, Zomato, Nykaa and Policybazaar operate, the hope is that over a period of time, the companies will end up capturing a major part of the market.

In the case of Nykaa, there is no other big competitor, at least for now. If the online market for make-up, skincare and beauty keeps growing, Nykaa will grow, too. If online food ordering keeps growing, Zomato will likely be No 1 or No 2 in that market. This explains why the demand among institutional investors for these stocks was very high. Hence, these stocks were sold at such high prices despite very little or no current earnings. This does not mean that the companies will be successful for sure, but the investors are willing to bet on them.

In Paytm’s case, this part of the story is clearly missing.

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