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Paytm (One 97 Communications) experienced the worst ever IPO listing day performance in recent history, plummeting 27% to Rs 1,560 per share from the issue price of Rs 2,150.

While the management claimed that the IPO was priced adequately, giving enough upside for IPO investors, there were clear indicators that the IPO was priced aggressively (much higher than worldwide trading rivals), leaving little or no upside for ordinary investors.

This is useful information for ordinary investors and, unexpectedly, several mutual funds that were caught up in the IPO excitement. After all is said and done, it is only to one's detriment to overlook the fundamentals. It's also easy to see why Paytm's listing day performance was so different from that of other recent IPOs like Nykaa, Zomato, and Policy Bazaar, which were all priced aggressively yet performed well in terms of IPO demand and continue to defend their listing prices.

Paytm is best recognised for its payments sector, in which it has carved out a sizable market position in a market dominated by the likes of PhonePe, GooglePay, and Amazon, among others. This company, on the other hand, has been affected by the increased use of UPI (where take rates are nil) and the decline in wallet-based payments. However, the company has a sizable customer/merchant base, which it is attempting to capitalise on by introducing a slew of new verticals, including consumer loans, co-branded credit cards, insurance distribution, wealth management, and so on.

However, the scalability of these comparably more profitable verticals needs to be seen, as none of them have grown up in a major way, and the payments sector still accounts for 70% of sales today. Each of these verticals will face unique problems and will require considerable time and capital to expand to the point where they are profitable and free cash flow positive. For example, despite being the market leader in insurance distribution, Policy Bazar is still losing money. As a result, profitable revenue growth is a difficulty, and management has provided no clear path to profitability.

Other minor variables that we feel contributed to the low demand were:

a) the IPO's large size of 18,300 croreb) the promoters' lack of major/significant shareholding in the company.

b)A large shareholding by Chinese investors (Ant Group + Alibaba Group), which could present regulatory barriers if Paytm decides to start its own lending operation.

We believe the suffering is not yet over after going over the causes for the under performance. The company still has a market capitalization of over Rs 1 lakh crore, which we believe is still on the high side. In the following days/weeks, the stock could face a big correction.