Paytm’S Befuddling Buyback Move | Bottomline

The company, in its filing, states: “The management believes that given the company’s prevailing liquidity/ financial position, a buyback may be beneficial for our shareholders.” This statement can be interpreted in several ways. Several motivations can be ascribed to this move, with some wondering whether this has been done at the behest of “some” shareholders.

Be this as it may, the proposed move throws up several questions that could have troubling answers.

The traditional purpose of a buyback is to return money to shareholders because a company is generating more funds than it needs. It also reduces the equity to be serviced and can enhance shareholder value even if a business enters a lower-than-historical growth trajectory. In Paytm’s case, there is insufficient cash generation at the moment, though the company has stated that it expects “to generate enough cash to fund net capex in 12 to 18 months”.

So, could the buyback have waited till then?

From the company’s perspective, it does have over Rs 9,000 crore of cash in hand, and if it sees healthy cash generation ahead, there is enough liquidity to undertake the move. This brings us back to the timing. Is the company undertaking the buyback to try and put a floor to the stock price that is now about a fourth of its IPO price? That would make the buyback more of a stock price management tool. And it raises the question, why not earlier?

The other question has to do with financial management and forecasting. If the company expected to generate adequate cash in the time frame, why didn’t it do a smaller fundraise in its IPO? Selling shares at Rs 2,150 and buying them back at a price likely to be significantly lower in a year is price arbitrage by the company.

What’s more, if the company couldn’t forecast its cash flow requirements a year ago, can we be confident that it can forecast its cash flows a year from now? And if it could, and if it can, was the fund raise via IPO more opportunistic than need driven?

These are troubling questions and can bring matters of corporate governance to the fore. If the company was hopeful of breaking even in a year or two, one wonders if it might have been better for the company and its shareholders if it had waited for this before launching its IPO. Anyway, what’s done can’t be undone.

Paytm shareholders can take solace in some of the management commentaries that suggest its loans and credit cards partnerships and volumes are growing even as margins for payments are set to shrink. And while the potential market size is undoubtedly large, there is a distinct possibility of increased competition from others in the payments business, like PhonePe and Google Pay, as well as existing players like Bajaj Finance, who are stepping up their digital play and new entrants like Jio Financial Services, which can queer the pitch.

If Paytm can turn cash positive, it will be a big achievement after having guzzled loads of cash—based on its cash flow statements, the company has raised over Rs 27,000 crore over the past eight years, of which it has burnt over Rs 17,000 crore. In just the last fiscal year, it burnt over Rs 1,200 crore at the operating level.

THE INVESTORS’ PLAYFIELD

Should you be buying Paytm?

Given the risks of the business, the nature of income streams, the lack of visibility in earnings and a possible another 7 percent dilution of equity due to employee stock ownership plans (ESOPs), the stock doesn’t seem cheap, no matter what reasonable EBITDA (earnings before interest, taxes, depreciation, and amortisation) assumption you use for FY24 or FY25.

What’s more, for nearly the same value (market capitalisation), there are enough other businesses that may be worth a closer look. So, before you make your investment decision, weigh the opportunity cost. Here’s a sampling of some companies with similar business values.