Ashwath Damodaran doesn’t see Paytm as passive investment, pegs valuation at $20 bn

Damodaran is an the award-winning Professor of Finance at the Stern School of Business at New York University. In most recent blogspot, he shared his analysis on Paytm’s upcoming IPO as “The Indian Smartphone Revolution: Paytm’s Coming of Age IPO!”. 

In July, Paytm payments app owner One97 Communications had filed its draft papers for ₹16,600 crore share sale. As part of the IPO, the startup will sell new shares worth ₹8,300 crore, whereas existing shareholders will sell stocks worth another ₹8,300 crore.

Damodaran, who is also known as the ‘dean of valuation’, has downgraded the Vijay Shekhar Sharma-led company’s valuation that Paytm seeks around $30-35 billion with its proposed IPO. He has priced Paytm’s share at ₹2,190.24.

He further stated that Paytm will not be a passive (buy and hold) investment, but one that will require active engagement and monitoring of the company’s actions and performance.

The NYU Stern professor claimed that the fintech firm’s growth and rise over the years are linked to India’s booming smartphone market, with users going for digital services as access to the internet gets cheaper in the country. This also includes the rise of digital payments. “Access to these smartphones, in conjunction with poor banking outreach in India, has created the perfect storm for a surge in mobile payments in India,” he wrote.

Paytm is India’s leading financial services company that offers full-stack payments & financial solutions to consumers, offline merchants and online platforms.

Damodaran adds, “Paytm will remain a dominant player in the Indian mobile payment space, as it grows, and that Paytm’s management will pivot from growing users to growing revenues and from growing revenues to growing profits, over time, with nothing in their history to back that up.”

Damodaran notes that almost all of the value of Paytm comes from expectations of the future, and there is significant uncertainty in every single dimension. Rate, profitability, sales to invested capital ratio could act as key challenges for the company.

“The value story for Paytm starts with a large and growing digital payment market in India, one that has surged over the last four years, and is expected to increase five-fold over the next five years, as the smartphone penetration rate rises for India and more merchants accept mobile payments,” writes Damodaran.