Paytm IPO to open today: Should you subscribe to the issue?

Paytm's parent One97 Communications, a leading digital firm, will open its initial public offering (IPO) today. The Paytm IPO will remain open for subscription till November 10. The price band for the IPO has been fixed at Rs 2,080-2,150 per share.

The Paytm IPO, if successful, will be the country's largest share sale with the firm aiming to raise Rs 18,300 crore. The IPO will surpass Coal India (Rs 15,475-crore IPO) and Reliance Power (Rs 11,700 crore IPO) in terms of issue size. The company has raised its issue size from Rs 16,600 crore ($2.2 billion).

The IPO comprises a fresh issue of equity shares of the face value of Rs 1 each, aggregating to Rs 8,300 crore and the offer for sale by the existing shareholders, aggregating to Rs 10,000 crore.

Allotment for Paytm IPO is likely to be done on November 15, 2021, and the allotted shares will be credited to Demat accounts by November 17, 2021. The shares of the company will be listed on the BSE and NSE on November 18, 2021.

Also read: Paytm headed for India's biggest IPO this Diwali, how does it make money?

Lot size of the IPO is a minimum of six shares for which one will have to spend Rs 12,900. A maximum of 15 lots comprising 90 shares can be applied for by spending Rs 1,93,500.

The Noida-based firm will use the proceeds of share sale to strengthen its payment ecosystem and for new business initiatives and acquisitions.

JPMorgan Chase, Morgan Stanley, ICICI Securities, Goldman Sachs, Axis Capital, Citi and HDFC Bank are the booking running lead managers to the issue. On October 22, Paytm had received market regulator Sebi's nod for the share sale.

Large investors such as Jack Ma's Ant Group Co and Masayoshi Son's SoftBank Group Corp will sell their stake through the IPO.

Through the offer for sale (OFS), One97 Communications Managing Director and CEO Vijay Shekhar Sharma will sell shares worth up to  Rs 402.6 crore while Antfin (Netherlands) Holdings will sell shares to the tune of  Rs 4,704 crore.

Also read: ‘Valuation lies in the eyes of money-holder,’ says Vijay Shekhar Sharma ahead of Paytm’s $2.4 bn IPO

One97 Communications offers consumers and merchants technology-led, easy-to-use digital products and services as well as easy and inclusive access to financial services. As of June 30, 2021, the company offers payment services, commerce and cloud services, and financial services to 33.7 crore consumers and over 2.2 crore merchants.

Here's a look at what brokerages said about the prospects of the share sale.

ICICI Securities said, "One 97 Communication (Paytm) is a play on digitisation of various financial services including payments, investments and financial solutions. At the upper end of the price band, the company is valued at 9.5-times post-issue book value (BV) and at 24 per cent of the annualised gross merchandise value (GMV)." The brokerage has assigned no rating to the IPO.

Jyoti Roy, DVP, Equity Strategist, Angel One Ltd said the digital payment platform will be benefitted from mobile payment growth and one should subscribe to it. "At the upper end of the price band, Paytm is valued at 49.7 times its FY21 revenues. While valuations may appear to be expensive, Paytm has become synonymous with digital payments through mobile and is the market leader in the mobile payment space. Patym is well positioned to benefit from the exponential 5x growth in mobile payments between FY2021 - FY2026, and hence believe that the valuations are justified. We recommend investors to SUBSCRIBE to the issue, " said Roy.

Also read: Paytm hints at Bitcoin offerings but only if India legalises it

KR Choksey recommends investors to subscribe for listing gains. "For the current valuations to sustain, the company has to remain on the path of high growth trajectory for revenues for a period of three years at least. All three verticals have to keep on firing at an accelerated pace," said a report from KR Choksey.

The brokerage said that the company comes under the purview of three financial regulators - the Reserve Bank of India (RBI), Securities and Exchange Board of India (Sebi) and the Insurance Regulatory and Development Authority of India (IRDA). Any unfavourable move by any of the regulators can materially impact the valuation.

Further, any delay in execution in any of the business segments can potentially affect the valuation as best case scenario is already priced in. "Most of the positives are already getting captured in the current valuation, leaving little room for sustainable upside," the report said.

Choice Broking has given a buy call to the share sale in the long term .

"There is a large section of population who are underserved in payments and financial services  products. Also, there  is  vast  population  of  small  businesses,  which  have  not  witnessed  the  benefits  of  digital commerce. One97 Communications has a large addressable market to serve. At the higher price band of Rs 2,150, it is demanding an EV/Sales  multiple of 46.1x, which seems to be stretched," the brokerage said.

"The demanded valuation is also at significant premium to China's Ant Group proposed IPO in 2020. Thus considering the growth potential and stretched valuations, we assign "Subscribe for Long Term" rating for the issue," the brokerage added.