What PayTM's flop show on debut means for investors/companies

PayTM had a nightmare of a debut yesterday. Issued at INR 2,150, the stock opened ~10% lower at INR 1.950 and then closed the day at INR 1,560 - nearly 27.5% down from the issue price. I had applied to the IPO and got my allotment. At one moment, I wanted to sell right when it opened but still held on to it. It hasn't been a great week for the equity markets in India with 4 continuous red candles this week. Today the markets are closed.

With a week like this, I was lucky to get profitable exits on SJS and Policy Bazaar but they were closer to the start of the week. PayTM was extremely overpriced and the market did not have the appetite to lift PayTM's stock despite a strong list of anchor investors for the issue. Does it mean the end of the road for PayTM? Is the company or share price doomed forever? I do not think so. I think the company has a relevant business model and there are significant avenues for growth for this company. Holding onto the shares is not a bad idea. Sure it may not have any USP left in the payments space as wallets become meaningless but it does have access to data and consumers (merchants included) that can help it venture out into other financial services verticals and become profitable. However, things like that do not happen overnight and one may have to wait long to see profits above the issue price.

What this crash of India's biggest IPO issue will do is bring some sense into the market. After Zomato's, Nykaa's, and Policy Bazaar's good listings, many start-ups would have wanted to list, and that too at expensive valuations. A big IPO crashing always helps calm things down and investors may start looking at companies more rationally. I don't think stretched valuations will go away but the scale at which they can be stretched may come down a little. Of course, for the outright sense to prevail, the market has to crash significantly and private capital has to become risk-averse to not chase stories but invest based on hard numbers. Right now, money is available easily and at cheap rates globally. People want to take PE/VC risk and funds can be raised easily. If IPOs keep coming to the market, then it is a sign that VCs can get significantly profitable exits i.e. more investors would want to park their capital with VCs. Once the IPO lists, the VC fund has made its exit. The crash is the problem of the participants of an inflated public equity market.

One big IPO flopping on debut will not change the risk tolerance of investors significantly. However, it may reduce the number of companies coming to the markets for some time, and also tone down valuations a little. Capital will still be available for those looking to raise money.