Analysts have assigned several reasons for the disastrous start, including an over-optimistic valuation for a company deep in losses, the large size of the IPO and even a report released on the listing day by equity research firm Macquarie. “The IPO pricing was not in sync with the prospects of the company. High valuations based on reported institutional commitments led to high pricing despite the fact that the business model of the company had come under pressure lately,” says Dhiraj Relli, Managing Director and CEO of HDFC Securities.
Leveraged subscriptions by HNIs may have also played a role. IPOs often get over-subscribed, leading to lower allotments. So HNIs usually borrow and apply for more shares than they want. But the mega-sized
IPO was too big. “There was hardly any oversubscription and everybody got more shares than their real appetite,” says Kunj Bansal, CIO of Karvy Capital. As Paytm shares fell, it triggered forced selling by lenders.
The Macquarie report took a dim view of Paytm’s prospects and set a target of Rs 1,200 for its shares, nearly 45% below the issue price. The share price dipped below Rs 1,300 briefly but later recovered. However, analysts are divided over whether the worst is behind for Paytm. “If there is no basis to justify the IPO price of Rs 2,150, there can’t be any basis to justify Rs 1,200 also because the company is making losses and there is low visibility of profitability in the foreseeable future,” says Bansal.
Will the Paytm listing debacle impact future IPOs? Analysts believe that the sentiment has been dented, at least in the short term. “Markets are driven by sentiment. In the same manner that
helped the IPOs that were coming after Nykaa, the Paytm IPO would take away something from there,” Zerodha Co-founder and CIO Nikhil Kamath told ET Now last week. Investors have also learnt a valuable lesson. “It might impact the enthusiasm amongst investors to subscribe to all kinds of issues,” says Bansal. Also, lead managers would be wary of bringing in the IPOs at unjustifiable valuations. “Future valuations by new-age companies could be more modest. Though retail memory is short, IPOs expected in the coming months will try to leave something on the table for investors,” says Relli.
Now that the share price has recovered, what should Paytm investors do? Bansal says the decision to remain invested cannot be based on the loss or profit from the IPO price. “Monitor the company’s performance for a few quarters. If the financial performance is satisfactory, hold. If not, exit,” he says. Relli has some advice for those singed by the listing losses. “Restrict the amount to be invested in each IPO and keep a strict stop loss in terms of absolute loss per IPO,” he says.