Why did the Paytm IPO did not perform well after listing?

Short Answer

One97 Communications, the parent company of Paytm came up with the largest IPO in Indian history but failed to perform well. Firstly the IPO was too big for the retail investors to digest. Then the valuations were extremely high which led to the HNIs and Institutions avoiding the issue. All together the overhype in social media led to massive losses for the retail investors as the stock fell almost 40% in two trading sessions.

Detailed Answer

Reasons behind the Paytm IPO failure

The current market scenario has given a range of superb IPO listings but not all IPOs are equal. A recent activity to support this statement is the failure of the much-awaited Paytm IPO.

One97 Communications, the parent company of Paytm came up with the largest IPO of Rs 18,300 crores. This came after the Indian equity markets had already witnessed more than 51 listings in the first 10 months of 2021. What advanced further was nothing short of a recipe for disaster. Let's look at some of the key reasons and outcomes of the mega Paytm IPO.

Key reasons behind the failure

1. Basic Economic principle of Supply and Demand

In the most basic terms, the theory of supply of demand explains that if the supply of any commodity increases, the price decreases, and vice versa. This played out perfectly in the case of the Paytm IPO. Indian investors had already seen a record number of companies raising capital from the secondary market. Companies had already moped up more than $9.7 billion (Rs 970 crore) from Indian investors in the first 9 months of 2021. After this, investors lacked the appetite to absorb such a massive issue.

2. Social Media Over-hype

In this digital era where people look for trading and stock market tips online, social media influencers are looked upon as stock market gurus. Retail investors often abide by the verdicts of certain Youtubers or Instagrammers who are not certified, financial planners. Taking advantage of this, many companies arrange conferences with media personnel to promote their IPOs. And the mass mentality led Retail investors to lose a significant chunk of their investments in the Paytm IPO. Even Warren Buffet became another narrative that captured the attention of retail investors. Warren buffet was portrayed as one of the investors of Paytm which steered them to the belief that the company would give multi-bagger returns.

The Aftermath

Even after poor subscriptions on the second and third day, investors did not skip the issue. The Retail quota was oversubscribed by 1.66 times. Though the IPO was fully subscribed, the HNI (High Net worth Investors) quota was undersubscribed by a mere 0.24 times.

On the date of listing, the shares were listed at Rs 1,950 or a discount of almost 9% against the issue price of Rs 2,150. This was not the end as the stock tumbled to a low of Rs 1560 by the day's end. Investors lost 23% on the first day and close to a total of 40% on the consecutive trading session. This marked Paytm as one of the worst performers in Indian IPO history.

Paytm price chart....jpg

Retail investors had lost close to 40% of their investments in a matter of 2 trading sessions. To provide some perspective, the Indian benchmark index Nifty corrected by 38% in a matter of 30 days after the Covid Pandemic hit in 2019.

Is the IPO boom over?

The poor listing of Paytm is definitely a setback for not only new-age Indian companies but any other traditional company. However, it cannot be considered to be the end of the boom.

Many companies had to experience the repercussions of this event. Mobikwik, another digital finance company that was looking to cash out with an IPO delayed its plans.

All things considered, the investor’s confidence in new-age start-ups might take a back seat unless the company is backed by solid numbers. Even in the case of Paytm, despite the financial standing being weak Retail individuals rushed on to it.

paytm subscruption...jpg

The subscription data also clearly showed that Mutual Fund houses and HNI had clearly avoided the issue. This resulted in the retail investors biting the bullet.

Conclusion

To conclude, the IPO boom might not be over. The silver lining of the Paytm issue was that buyers showed interest in the stock at the discounted price of Rs 1,290. In a report by Macquaire, they had valued the company at Rs 1,200 per share which is extremely close to the low made by the stock.

The stock rebounded soon after and closed at Rs 1765 on 26th Nov. Therefore if an investor had held on to the stock, they would have been incurring a notional loss of around 9%. Which is not that bad. Although doubling your money in the next 6 months seems a tall order but breaking seems not. With the increasing penetration of the internet and smartphones, the fintech space is set to lead the next leg of IPOs. With that said, it will be wise for investors to wait for the dust to settle before hopping on to the next IPO. There are numerous opportunities that could be utilized to make some cash, provided you do your due diligence.

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Categories: IPO Basics
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Related FAQs

Why did some of the recent IPOs gave poor listing gains? Is the IPO craze over?

IPOs have been extremely popular lately as a result of increased retail participation, ongoing bull run, and massive listing gain opportunities. However, the Indian stock markets went through a minor correction which resulted in a muted performance of some IPOs. The market negativity coupled with the lofty valuations of some of the IPOs led to poor listing gains, but the craze might not be over.

How to find good companies as there are many publicly listed companies in the Indian stock market?

To find good companies out of the thousand companies listen on the Indian stock exchange, you can filter stocks on the basis of certain parameters such as Market cap, Debt to Equity, Dividend payouts, Revenue and Profits growth, etc. You can easily use an online stock screener to find out these stocks.

IPOs seem the modern money multiplying investment, Should you invest?

Good quality IPOs are great options for investors when considering investing in an IPO. However, IPOs should not be taken as money multiplier instruments and invested in. Multiple IPOs have performed badly due to extremely high valuations and poor financials. Hence, it is important to evaluate the financials of the company before investing in them.

Is IPO investing good for new investors?

IPOs can be a good option for beginners as they provide an opportunity to get the shares of good companies at an attractive price. Though IPOs can provide good listing gains and quick profits, good companies can help you to create massive wealth in the long term.

I want to invest for short time so please let me know which IPO will give positive gain?

Selling the IPO shares on the first day of its listing could get you considerable postive gains. But there is a higher chance for the prices to rise and even fall if you wait for a more extended period.

What is an IPO or Initial Public Offering?

IPO or Initial Public Offering is the process through which a private company goes public by offering its shares to the public for the first time.

Can NRI invest in Indian stock market?

Yes, NRIs can invest in Indian stock market. It is essential for the individual to check if he is considered as NRI or not according to the norms of the government. If yes, only then he can invest. There are also certain rules and regulations that must be followed.

Can we sell IPO shares immediately?

In an Initial Public Offering (IPO) a company sells its shares to investors in order to raise money. As a retail investor, you can apply for an IPO from the primary market in order to get the shares offered by the company. Once the shares get listed on the secondary market, you can sell your shares provided you have received an allotment in the primary issue.

Is Paytm Money Safe and reliable Broker for Stock Trading & Investing?

Yes, it is completely safe to invest your money in the stock market using Paytm money App. In fact, PayTm has come up with stock broking services recently and trying to establish itself in the said field. And, to give tough fight to top existing players it has to keep its services up to the mark. Paytm Money made a big name in mutual fund investment industry and now it's time to see its performance in the stock brokers' world.

What is the minimum and maximum for investing in an IPO?

The minimum and a maximum number of shares are defined in Lots in an IPO. The minimum number of Lots that a retail investor can apply in the Retail Segment (RII) is 1 Lot and the maximum number of Lots that can be applied should be less than 2 Lakh Rupees. On the other hand, if one wants to apply for more than 2 Lakh rupees then they can apply in the NII (Non-Institutional Investor) category where the minimum amount for investment is 2 lakhs and the maximum amount is not capped.