5 Risks one should know before subscribing to PAYTM IPO

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PAYTM IPO opens today where the company is looking to raise nearly Ra. 18,300 cr from investors.

This is the largest IPO in Indian markets.

The company has done exceedingly well in transforming the entire payment services industry. However, it is important to know at some of the key risks before subscribing to the IPO.

1. Consistently Loss Making

PAYTM has reported net losses in each of the last three financial years. Even operationally (at the EBITDA level), the company has incurred losses

Cash Flow from Operations are negative

The revenue has stayed flat between FY19 & FY20 and declined in FY21

Moreover, there is no clear direction towards profitability

2. Brutally Competitive Space

There is no doubt that the growth trajectory for the industry (Payment, Commerce and Financial Services) looks promising but it is also an extremely competitive space where players with deep pockets are also looking to gain market share

The technology in the payment services industry is continuously evolving which increases uncertainty

3. High dependence on payment services

Payment services accounts for 75% of its total revenue

The company earns this revenue from the transaction fees it collects from merchants

This means they would have to consistently add more partners / increase transaction size / broaden the scope of its products and services to achieve higher revenues

4. Changes in Regulatory Factors

PAYTM operates in highly regulated industries and is regulated by IRDAI, RBI and SEBI for its different businesses

Any adverse changes announced by the regulator could impact PAYTM’s business as well

5. Valuations

PAYTM’s post issue market cap is expected to be nearly Rs. 1.38 lakh crore, Yes Right!

That is a whopping 43x FY21 Sales

There is no doubt the growth prospects are great, but the valuations are RICH!

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