Why I Am Bullish on Paytm Share despite a flop IPO

Paytm was probably the most anticipated IPO for 2021. The fintech company that single-handedly helped us go through demonetization was getting listed. But things started to seem bad when the IPO got a poor-than-expected subscription. It did get subscribed completely, but IPOs are around the same time got more subscriptions than Paytm. But just like Vijay Shekhar Sharma, the CEO of Paytm, even I think that the Paytm model is not completely understood.

What went wrong with Paytm IPO?

Everything looked good, but just a few days before listing news started floating that the GMP of Paytm or the grey market price of Paytm had erased its premium and it was trading only a few rupees above its IPO price. On the day of listing, Macquire, a research-based company gave a target of Rs. 1200. Most people, who got their first-ever IPO allotment were now feeling a little uneasiness. And when Paytm was finally listed at around Rs. 1,900, it sharply fell to around Rs. 1600 within a few minutes! In the afternoon, on the same day of listing it finally hit a lower circuit, courtesy to CNBC interview with Vijay Shekhar Sharma. 

But what went wrong? Is it the valuation that was too high to ask for a subscription or just volatility? Unfortunately, no one can answer this, but I will now tell you the reasons why I am bullish on PayTM stock and the company. 

What makes me bullish on Paytm?

There are various reasons why I am bullish. I will talk about its fundamentals and I'll also compare it with a few NBFCs and fintech companies. Let's now see some of the factors that make me feel PayTM's stock will be in a bull run soon.

Business and fundamentals

PayTM is a loss-making company and that's why most people are afraid of it. We have other loss-making companies like Indigo, Tata Motors, but all of them to be in a bull run, but why are people afraid of Paytm? It's because it's the first time India is experiencing the new generation of loss-making Fintech IPOs, but that's totally fine. There are many such stocks listed in the United States of America and other countries.

Currently, it's in a user acquisition phase where the company is shelling money to grab more and more loyal users who in the future will be the key to profitability. 

Now you must be wondering how can Paytm turn profitable? Here are a few business verticles in which PayTM works:

POS and SoundBox

I'm sure that you have heard the message "PayTM par XYZ Rs...." while making payments to your nearest store or business even if you make a payment through Google Pay or PhonePe. It's the PayTM's SoundBox that has been deployed by the merchant. And it doesn't come for free. Currently, it has subscription-based pricing of Rs. 125/month. PayTM in their business update showed that within one year they deployed 1 million such devices. Also PayTM is marketing their all-in-one POS that helps merchants accept Payment through various options like a credit card, UPI, PayTM wallet.

PayTM Money

Paytm Money is a stockbroking cum mutual funds platform just like Zerodha and Groww, and as per this article by XYZ, Paytm Money has surpassed Zerodha in terms of number of users. They can, like Zerodha, pledge users' shares and lend them money for trading. Obviously, they will earn more and more commission from trading activities. And now it's obvious that gen-z people are investing a huge amount of money in stock markets and cryptocurrency (I wonder where will the investors go after the cryptocurrency ban).
Paytm Money can further go into a full-fledged war with HDFC AMC, ICICI Securities, etc. and the winner has to be PayTM, thanks to its huge userbase and young generation users.

PayTM Bank

 As per this article PayTM is applying for a license for Paytm Small Finance Bank where they can reap the benefit of their millions of app users. Also personally managing a bank using the Paytm app seems a lot easier than using the iMobile and HDFC Mobile banking app. Just saying.

Lending Loans

 Bajaj Finance and Bajaj Finserv. The shining stars of the Indian stock market. Their business model revolves on retail lending. But what if PayTM uses its millions of users for lending cash just like Bajaj Finance? Even 10% of users, if converted would be a lot when compared to Bajaj Finance's. Won't taking loans from the app be much easier than filling forms and waiting for approvals and follow-ups? In a recent business announcement, PayTM showed off its 400% increase in loan disbursement rate as compared to the previous year. According to me, once PayTM starts lending, which it is currently doing, but not on a large scale, it can become a larger company than Bajaj twins. Remember the PayTM's all-in-one POS that we talked about? It allows merchants to convert their customers' payments into EMIs as well.

Recharge, Movie Tickets, Flights, etc.

Currently, this sector looks unprofitable because there is a very low commission margin in making these payments. Do remember that such companies need to pay payment gateways fees while making payments though Paytm doesn't because it handles payment on its own and doesn't rely on third-party payment gateways, still Visa/Master card fees, etc. make their profit negligible. 

Recently PhonePe has started to charge users on recharge and bill payment on UPI transactions as well which makes it obvious that PayTM and other apps will also follow this. Macquire, while pricing PayTM in their research also wrote that "A 10bp fee on UPI provides a fair value of Rs 2,900-3,300 based on PSG/DCF" and it looks like it will become a possibility sooner than expected!

Payment Services

With a huge rise in salaries in IT and professional services-related sectors, companies aggressively provide benefits to their employees. Everyone loves to save tax, just like employers. PayTM offers them Food Wallet, Fuel Wallet, etc. I think it's a very good business verticle because competitions like Zeta are way behind when it comes to brand value and PayTM can have a monopoly in this verticle.

Valuations

Many analysts have raised their eyebrows on the valuations of PayTM, but now I will compare the same with other listed companies in India. Bajaj Finance has a market cap of 4.10L crore whereas PayTM has 1.16L crore (as of 27th November 2021). PolicyBazaar has a market cap of 57Tr crore which is almost half of PayTM's. What makes Paytm's valuation look unrealistic or high to analysts? PayTM can do everything that Bajaj Finance and PB Fintech can do. And don't forget that PayTM has more users than both of the companies combined. While the number of PayTM users doesn't make any sense because not all will be converted to customers in all the businesses, but even 10% of PayTM's users if converted will be a good challenge to other fintech and NBFCs.

Conclusion

The list doesn't end here. There are a lot of segments like PayTM cloud, PayTM first games, digital invoicing, super app where Paytm has its significant presence.

Remember that the company has raised money to acquire a larger user base either through cashback offers or advertisement which looks good for the future of the company. 

According to me PayTM will be in a bull run very soon and I'll definitely ride it. Will you? Let me know in the comments!