Why the Paytm listing is a classroom in stock market investing

The listing of Paytm was expected to be weak after it was subscribed just 1.89 times. However, what followed in the first 5 days of listing was sheer drama. From an IPO price of Rs2,150, the stock dipped to an intraday low of Rs1,271, a loss of 40.9% in less than 2 days. However, over the next 3 days, the stock bounced 41.5% from the lows.

Nov 26, 2021 09:11 IST India Infoline News Service

The listing of Paytm was expected to be weak after it was subscribed just 1.89 times. However, what followed in the first 5 days of listing was sheer drama. From an IPO price of Rs2,150, the stock dipped to an intraday low of Rs1,271, a loss of 40.9% in less than 2 days. However, over the next 3 days, the stock bounced 41.5% from the lows.

Data Source: NSE

Obviously, projecting the future direction of the Paytm stock would be best avoided considering the extreme volatility. It would also be tough to say whether Paytm is under-priced or overpriced, as putting a value to any loss making company is tough to begin with.
The point is what Paytm taught investors in the first five days of listing. This is not just about Paytm but to stock investing in general. Here Paytm is just a case study.

1) Even digital is a heterogenous business

Just a couple of weeks back, all digital businesses / ecommerce businesses were strait-jacketed. What the Paytm IPO proved is that even within digital space, businesses can be as different as cheese and chalk. For example, Zomato is a food delivery app and Nykaa is fashion marketplace while Policybazaar is an agnostic insurance marketplace. Paytm is perhaps a bit of everything and something more.

Without getting into the merits of the models, the key takeaway is that there is a lot of heterogeneity within the broad digital model. Just because one digital model clicked in the stock market post-listing, does not mean that all digital models will click.

2) Smart money always buys into a fall

Even if any trader had bought Paytm on Thursday or Monday, they would be sitting on gains of 20-30%. That is an incredible amount of money in less than 3 days. The point is not about timing the buy or about buying amidst panic. It is about buying a stock at a lower price.

At the end of the day, Paytm story is backed by formidable global investors like Ant Group, Softbank and Berkshire Hathaway. Not surprisingly, global investors like Blackrock and Canadian Pensions were gorging on Paytm during the fall. The point is; you don’t need to catch the bottom, but it always makes sense to buy a stock 20% lower.

3) Go big or go home is the way it should be

One of the driving forces of Paytm and Vijay Sekhar Sharma has been the motto “Go big or go home”. That motto has come in for a lot of criticism, but just look at the top value creators and find one company without ambitions of scale. Be it Reliance, Adani Group, TCS, Infosys or HDFC Bank; real value came with scale and size. That is what eventually led Tata Motors, Tata Steel and Hindalco to make those risky billion dollar acquisitions.

How big is Paytm. Forget about revenues and losses. It is a company with a database of 33 crore active customers 2.3 crore merchants and billions of transactions. That is the kind of size that is hard to replicate and very easy to monetize in the long run. That is something to not miss out.

4) When everybody has the same problem, it is not a problem

Some of the complaints about Paytm have been; it is loss making and its valuations are driven by liquidity. The good thing about problems is that when it afflicts everyone, it is not a problem any longer. Relentless flow of liquidity, steep valuations and digital losses are the norm not the exception. While any company eventually needs to make profits, these arguments cannot really be held against Paytm alone.

5) When in doubt look at CAGR returns

Quite often investors ask if Paytm is worth the risk. From an agnostic standpoint, there are not simple answers. But there is a basic rule here. When in doubt, look back at what the company has delivered in terms of value and that will answer your question. Here is a small case that encapsulates the essence of the story.

Paytm, as we know it today, was formed only in 2010 with a base capital of $2 million or Rs. 15 crore. That company is worth Rs112,000cr at present. A quick back of the envelope calculation would tell you that this translates into CAGR returns of 123% over a period of 11 years. This may not be the indicative but is surely suggestive.

6) Beware of the predictions of oracles

When the IPO opened, a leading international broker had predicted a 44% downside on the stock and it turned out right in 2 days. One must be wary of such predictions; as they often range from being visionary to being ludicrous. Just consider Bear Sterns.

Back in 2004, the Congress-led UPA surprisingly formed the government against all odds.  Bear Sterns had then predicted the UPA government would fall in less than 3 years under the weight of its own contradictions. The UPA government went on to survive for 10 full years. Ironically, Bear Sterns went bust in a little over 3 years. That, perhaps, sums up the other side of prediction by oracles.

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