India's Biggest Ever Initial Public Offering Crashes 27% On IPO Day

Just like the rest of global equity markets, 2021 has been a monumental year for Indian stocks and it culminated overnight with the nation's biggest ever IPO, when One97 Communications Ltd, the entity that operates Indian digital payments platform Paytm, went public at a price of 2,150 rupees per share, the top of a marketed range. The digital payments company raised 183 billion rupees ($2.5 billion), India's largest ever IPO when measured in local currency, surpassing Coal India's in 2010. That IPO was worth 155 billion rupees ($3.48 billion), according to data from Refinitiv 

Alas, the party then quickly died when PayTM shares opened below the 2,150 rupees ($28.60) issue price, before closing down a whopping 27% at 1,564 rupees ($21).

According to some analysts, the post-break flop reflects fears about Paytm's business: the company, which is now worth almost $14 billion, lost hundreds of millions of dollars last year and seems far from ready to turn a profit. It's also up against growing competition from some of the biggest tech firms in the world.

"The outcome of the IPO was not in doubt," Madhur Deora, the president and group CFO of Paytm, told CNN Business last week. The former investment banker has been with the company for five years.

But the amount of attention it drew took him by surprise. With backing from iconic investors such as Warren Buffett, Masayoshi Son and Alibaba, Paytm is one of India's best funded startups. Its public debut has been keenly watched by professional and amateur investors alike. However, its subsequent plunge was certainly not expected.

A little history.

India has been churning out billion-dollar startups for years, but the rush for those unicorns to go public started only a few months ago.
"A lot of well-wishers and friends messaged [me], saying, 'Oh, I'm getting a prayer done at Golden Temple for Paytm's success," said Deora, referring to the central place of worship of the Sikh religion.

They weren't alone. Paytm's founder, Vijay Shekhar Sharma, went to "seek blessing of God" at the Tirupati Temple, one of India's most famous places of worship, on November 8 — the day Paytm launched its IPO.

That day also marked five years since Prime Minister Narendra Modi banned two of the country's biggest currency notes. The move was hugely disruptive for the economy, but it helped Paytm grow at an explosive rate: The company signed 10 million new users within a month. It made us "a folklore name in this country," Shekhar told CNN Business in 2019.

Thanks to the momentum provided by the cash ban, Paytm would soon be the biggest payments platform in one of the world's fastest growing economies. It has 337 million registered consumers and 22 million merchants, according to its IPO filing. At the listing ceremony on Thursday, an emotional Sharma called the company's purpose of bringing millions of Indians into the mainstream economy "pious."

Foreign investors have been enthusiastic. The company raised $1.1 billion from BlackRock and the Canada Pension Plan Investment Board just before the IPO opened, according to an exchange filing. And on the day of the launch earlier this month, Softbank (SFTBF) founder and existing Paytm investor Son declared that,"for us, their IPO should be a great event."

However, the response in India has been different: While Paytm's IPO was eventually fully subscribed, much of the local media coverage has been lukewarm, highlighting that the company took longer to find buyers for its shares than two other Indian startups in recent months, food delivery company Zomato and e-commerce firm Nykaa.

"I think the real story here is that someone aimed to do something that had not been attempted before and many thought could not be done in the Indian capital markets," Deora said, in reference to the challenge of launching such a large IPO before the company has turned a profit.

Paytm's losses had analysts worried about whether the company can justify its valuation. The company, based in the New Delhi suburb of Noida, posted a loss of 17 billion rupees ($230 million) last year on revenue of 31.86 billion rupees ($430 million). Profits, natirally, aren't on the horizon any time soon.

"We expect to continue to incur net losses for the foreseeable future and we may not achieve profitability in the future," it said in its IPO filings, adding that the company will continue to spend heavily on hiring, marketing and building infrastructure.

"Two years ago, we were in this super high investment phase where we were creating a lot of consumer and merchant traction on the platform," Deora said. "We have found that it is easier — much easier — than two years ago to acquire and retain customers, hence, we are spending a lot less."

Concerns about Paytm's profitability, or lack thereof, exploded on the first day of the IPO and from the moment it broke for trading, the stock suffered a tremendous selling pressures, which dragged it lower some 27% for the day. It will be ironic if the IPO price is also the highest price the stock hits.

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The dismal reception of the biggest Indian IPO dragged the broader market, sending Indian stocks lower for their third daily loss.

"Paytm’s weak debut has had some impact on investor sentiment, but it’s short term,” said Amit Khurana, a strategist at Dolat Capital Markets. “Since earnings season is over and most of the big IPO listings are done, we may see a fresh bout of selling.”

Don't worry Amit: it may be down today, but central banks are nowhere near done injecting trillions, and soon quadrillions, in liquidity. Soon enough, the stock will rebound if for no fundamental reason - heck, the company may never turn a profit - but just because it is another money-losing cash sink in a world where liquidity has never been greater and is rising every day.

Disclaimer: Riki nema disclaimer.

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