India’s largest IPO in a decade has turned a flop show! One97 Communications Ltd, the parent company of digital payments app PayTM, lost 27% of its share price on the day of its listing. Domestic retail investors had high hopes on the Rs 18,300 crore IPO. Nevertheless, investors were left surprised when the shares were listed at a discount on the stock exchanges. In this piece, we explore the possible causes that led to the failure, and whether the stock has any future investment prospects. 

Offloading By Promoters and Hedge Funds

The company planned to raise a total of Rs 18,300 crore through its IPO, Rs 8300 through a fresh issue (which goes to the company), and Rs 10,000 through an Offer For Sale (which goes to the promoters). The signs of an IPO debacle were pretty much evident at the beginning of the month. The highest number of shares were offloaded by Jack Ma’s Antfin (Netherlands) Holding B.V, Alibaba Group, and SoftBank Group. Other offloaders included some promoters and hedge funds. Hedge funds and Investment funds have an appetite for risk. They generally avoid playing on smooth grounds. Seemingly, the investment, venture capital, and hedge funds tried to take some money home by offloading stakes in the company. This wouldn’t have been the case if the companies saw a greater opportunity in the IPO.

Retail Investor Hype!

On November 3, 2021, the US Fed announced its plans to begin tapering quantitative easing by reducing interest rates and selling government bonds. While the announcement did not trigger a sudden reaction, investors knew it was time to slowly get their hands off high-risk assets, but obviously not the retail investors. Retail investors are individuals like me and you. The IPO was subscribed only 18% on Day 1. The retail segment was subscribed 78%, while the Qualified Institutional Buyers (QIB) and Non-Institutional Investor (NII) segments were subscribed only 2% and 5% respectively. By Day 3, India’s ‘largest’ IPO was subscribed 1.89 times, a small number for the hype around the company. In the end, the Foreign Institutional Investors and Retails investors managed to see the IPO through an oversubscription. 

Bad Timing

Timing is the most crucial element in an IPO. PayTM’s IPO is one of the last few IPOs of this season. The IPO bull run was powered by a rush of liquidity globally through quantitative easing and expansionary fiscal policies by various governments. This sudden rush of liquidity made its way to shares, IPOs, and other high-risk venues. The NIFTY and SENSEX are at an all-time high, and all the available liquidity has already been invested in the markets or IPOs. Almost all of PayTMs peers, despite high valuations, sailed through smoothly and gave investors a bang for the buck. This makes us ask, why did PayTM IPO fail while the IPO of its tech peers like Nykaa and Zomato sailed through smoothly?

We at marketfeed, in our article titledNykaa IPO: All You Need To Know’, pointed out the following:The IPOs are coming out all at once with extremely high valuations and buzz in the market. It might leave the market out of liquidity. Nykaa is the first IPO going up in November and might therefore have a first-mover advantage. The company has grown significantly in a very small period, much faster than its other tech-commerce peers.”

The Future

Analysts had already signalled overvaluation for the company. An overvalued IPO can only sustain in a bull run. When the bears kick in, the fall can be bloody. The market has correctly valued the company through the discounted listing, dragging it towards the median valuation. As they say, the market decides its best value. Macquarie (a research firm) has assigned its lowest rating ‘underperform’ to the company. 

Despite being a loss-making company, Paytm has managed to trim its losses and expenses. While the company remains in net loss, its financial growth and stability have been healthy recently. The company does not have one specific listed competitor. It has a competitor in just about every domain it operates. This over-diversification can stunt the growth of the company in parent segments. The Macquarie report has mentioned that the company has ‘too many fingers in too many pies’. 

We are at the peak of the market cycle The flopped PayTM IPO is a red flag for over-valuation. While the company’s promoters made quite some money because of overvaluation, the retail investors suffered. Certain news reports suggest that analysts have advised to ‘sell and book loss’ to those who have received an allotment. It is advised that retail investors perform thorough research and take due caution before making a move.

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