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Indian tech issuers: rein in rich IPO valuations

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Paytm flop signals a much-needed correction in tech stocks

Confidence in Indian technology stocks has been rocked over the past few days by the flailing market debut of Paytm, India’s leading digital payments and e-commerce service provider. Its dismal performance is a sign the sector is overheated — and should call into question the lofty valuation ambitions among issuers.

Paytm, registered as One97 Communications, floated on November 18 after a Rp183bn ($2.46bn) IPO, India’s largest ever listing in rupee terms. But the shares traded down 27.44% on their debut, falling from the Rp2,150.00 IPO price to close at Rp1,560.00 on the NSE.

By the market close on Tuesday, the stock had lost 23.60% of its value since its debut, having rebounded nearly 10% on Tuesday.

The debacle surprised some investors, but it could be seen in the cards during bookbuilding for the IPO: despite being hotly anticipated, the public offer was subscribed just 1.89 times, with most of the orders placed by foreign institutional investors. Retail investors covered their portion of shares 1.66 times, while non-institutional investors only subscribed for their stock 0.24 times.

The reason for the relatively lukewarm interest? Paytm’s valuation — understood to be as high as 70 times its operating revenue — was simply too rich.

Paytm has no close comparables in India, but global peers are valued around 25 times, with Alibaba Group Holding’s affiliate Ant Group, an existing shareholder of Paytm, at just below 20 times. Paytm could not be reached for comment.

But investors looking at the booming market for tech IPOs in India should not view the Paytm slump on an isolated basis. There are more signs of pressure on the market too.

Other technology start-ups have been feeling the heat, with stocks including Policybazaar, an online insurance marketplace, and food delivery service Zomato trading down in recent days.

Zomato initially soared 25% through the first two weeks of November, before falling 7.2% over the past five days to close Tuesday at Rp149.25. Policybazaar debuted on November 15 and soared 47.75% over the following two days, but turned around on November 18, losing 15.74% of its value since.

Digital financial services firm Fino Payments Bank, as well as specialist e-commerce platform Nykaa — both of which listed earlier this month — also traded down over the past week. All the firms likely felt the pain from the Paytm slump and growing investor caution.

But a market can only rally so much before correcting itself, and tech stocks in India were bound for a revaluation.

Zomato had kicked off the trend for consumer tech IPOs with its listing in July — the first by a loss-making unicorn in India. Its popularity gave the country’s tech start-ups an alternative to listing overseas, which many were considering.

But compared to global markets, loss-making companies are novel for Indian investors. This explains why large foreign institutional investors have supported the recent slew of IPOs, but local institutions, funds and retail buyers have had some catching up to do.

A wake-up call on valuations now will bode well for the long-term development of the market, given the number of tech firms plotting a domestic listing.

The immediate impact will be worrying.

Some issuers may choose to wait and see where the market settles before kicking off their listings. Others may put their deals on the backburner for the time being and continue opting for private fundraising. In either case, valuation discussions will become incredibly important.

If the Paytm crash has shown anything, it’s that technology and fintech issuers need more than just an attractive story to attract investors. Reasonable valuations, and a business model ripe for future growth, will be key too. IPO-hopefuls should be prepared to go back to the drawing board.

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