Paytm has been a digital payments pioneer and household name in India for the past decade or so. For the most part, it has been a 'mobile wallet,' allowing you to load cash and pay merchants via a mobile app.
Paytm launched its initial public offering (IPO) on November 18th of last year, making it the largest in Indian history. Paytm founder, Vijay Shankar Sharma, had long hoped for the company to be the largest and brightest of its kind in the world, particularly in India.
Outstripping the largest IPO in Indian history up to that point, that of Coal India in 2010, was one emphatic way to mark its formal entry into the big leagues of global and Indian business.
Go big or go home
Sharma has become so fond of the phrase "go big or go home" that it has become the company de-facto motto.
The stage was set for both Sharma and Paytm to receive a large sum of money. Over the previous five years, India had learned a lot about him and his company from his relentless media presence, as well as his investors, who included the biggest names in global venture capital, such as Alibaba, Buffett, and Softbank.
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After all, Wechat Pay and Alipay, the mobile payment giants next door in China, were worth astronomical sums, with estimated valuations of $86 billion and $315 billion, respectively, with the latter eventually plummeting to around $108 billion after being yanked by the Chinese government right before its IPO.
Sharma personal storey is one you want to root for: a small-town boy from northern India, his father a local schoolteacher and his mother a homemaker, who spoke only Hindi and travelled to Delhi to study engineering at the unusually young age of 15.
He went from being an academic star to a backbencher who struggled because he was shy and introverted, and he couldn't speak English. Nonetheless, he never gave up on his entrepreneurial dreams.
Sharma burst into tears at the opening bell of the stock being listed, a catharsis for all the toil and struggle of his early years. Paytm bankers and Sharma had agreed to set the IPO price at Rs 2,150 ($29), valuing the company at $20 billion and resulting in a big payday for everyone.
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Shunk by the hype
The bell that appeared to ring in Paytm victory may have been ringing for other reasons. Paytm stock plummeted by 27 percent, the largest drop in Indian IPO history.
The stock analyst firm Macquarie report on Paytm may not have been entirely responsible, but it certainly didn't help. Arriving a few hours ahead of the listing and titled There are too many fingers. Macquarie sliced open what it thought was a puffed-up piece of a company that Sharma and his bankers had marketed to the press, investors, and others in far too many pies. This was something that many other observers had noticed, though not with such lethal timing.
First and foremost, Macquarie emphasised that the company had never been profitable. It reported a net loss of 473 crore ($63 million) in the second quarter of its fiscal year ending July, compared to a net loss of 437 crore (58 million) in the same period the previous year.
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The issue that Macquarie and others were having with Paytm was that the company appeared to be taking in cash but not producing much in return. Up to 70% of its equity infusion was being used to stem the tide of red, with the majority of it being spent on advertising.
Macquarie described it as a "cash-burning machine," and perhaps most shockingly, revenue fell by 11% to 3,187 crore in FY21, which is unheard of for a high-growth, digital company.
At the time, New York University professor of finance Aswath Damodaran stated in BloombergQuint that Paytm appears to operate on "hyperbolic forecasts from its founder and top management that are off by a factor of three or four."
According to many analysts and observers, the company diversification drive into a confusing and unconnected group of businesses was perhaps the biggest problem, and it is the one that further clouds the firm's outlook in the future.
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Too much for too little
In the last three years, the company has expanded into consumer lending, credit cards, wealth management, insurance distribution, and areas unrelated to its core competencies such as movie ticketing, fantasy sports, and e-commerce.
Paytm entry into these markets coincided with a shift in the Indian payments landscape that significantly shifted the company dominant position. But the storey began long before its meteoric rise.
In late 2016, Indian Prime Minister Narendra Modi made a disastrous decision for the Indian economy and the welfare of its citizens by withdrawing all Indian 500 and 1000 notes from circulation overnight and without warning, causing widespread hardship and suffering. This move was especially damaging to India poor.
Sharma had taken out full-page national newspaper ads that morning, with Modi photo emblazoned on them, hailing his decision and Paytm impending dominance.
He even mocked those who were unable to obtain cash, telling them to 'Paytm' it because ATMs were closed.
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And Paytm did indeed rise to prominence, becoming the de-facto solution for cashless transactions as cash itself became scarce as a result of the deeply flawed demonetisation drive. Following that, it attracted a number of high-profile investments from the world's wealthiest billionaires, including Warren Buffett, Jack Ma, and Masayoshi Son.
Then came the moment of truth, a watershed moment for Paytm. The Indian government launched UPI, a full-stack payments gateway that allows people to send money to other people or institutions using their bank account. It quickly became the preferred method of sending digital money.
However, there was a major business model issue with Paytm wallet based solution: the platform was free for all consumers and merchants.
Despite the fact that this existential quandary had been detailed in numerous articles, it did not appear to deter the team that charted the course for the company IPO.
As a result, rather than soaring on its listing day as expected by founders, promoters, and investors, Paytm stock price plummeted by 27 percent from ₹1,955 per share on listing to ₹1,564 per share by the end of the day, the largest first-day loss in India IPO history. It is currently trading at ₹795, a significant discount to its opening day high.
Global competitors such as Walmart Flipkart PhonePe and Google Pay began to gain market share and now hold % and 34 %, respectively, with Paytm trailing at 14 ℅.
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An uncertain future
So, what does the future hold for a company that does not have a dominance in any market?
Paytm is certainly far from the downs and outs. It has deep-pocketed investors, Sharma has a firm and determined CEO and investors who have lots of cash.
The best-case scenario for Paytm is to get a banking license, a proposition that is not easy. It currently has a license to operate a payments bank, which is more or less a clearing house without permission to issue credit, which would be an ideal target for any company in its place.
As Digant Hera of GreenEdge Wealth Services points out, even if it turns out to be a company that has $15 billion in debt, other established banks already exist, and certainly doesn't face Paytm negative valuation.
Furthermore, more than 30% of Paytm is owned by Chinese investors, and at a time of geopolitical tensions between China and India, the future appears difficult at best, according to stock analyst firm Macquarie.
To compound its concerns, the company recently lost a number of high-profile executives, including its chief operating officer of Paytm Payments Bank, the COO of its offline payments division, and Abhishek Gupta, senior vice-president and COO of Paytm.
Warren Buffett, a man revered for his astute, value-driven stock market picks based on solid fundamentals of earning power and strong future growth, must be kicking himself.