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India

EM digital payments: Paytm’s IPO woes reflect a broader sector malaise

  • The aggressive valuation and transaction size has made Paytm, India’s largest-ever IPO, tough for investors to digest

  • EM digital payments shares are 20% off their February peak. High multiples and rising rates are key headwinds

  • IPO aspirants may need to re-set their valuation expectations. Stripe is now saying it is happy to remain private

EM digital payments: Paytm’s IPO woes reflect a broader sector malaise
Rahul Shah
Rahul Shah

Head of Financials Equity Research

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Rohit Kumar
Rohit Kumar

Global Financials/Thematics

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Tellimer Research
24 November 2021
Published byTellimer Research

After following the aggressive pricing template set by Egypt’s e-finance, Paytm’s shares have also struggled to stay afloat in post-IPO trading. In addition to stock-specific concerns (such as the long path to profitability), we think this experience is consistent with the broader malaise that has hit the EM digital payments sector since it peaked in February 20210. Relative to global equities, the sector has declined 30% since then.

EM digital payments shares have underperformed global equities since February

Economies re-opening from pandemic lockdowns likely drove the first leg down, by giving investors access to a broader universe of growth stories. More recently, rising interest rates have put pressure on these high duration names (the sector is on median trailing price/ sales of 5.3x, versus emerging market equities on 1.5x and global equities on 2.4x).

Stripe hired lawyers to advise on its listing process in July, but this week rowed back on the idea, with co-founder John Collinson indicating that the cUS$100bn-valued firm is happy to remain in private hands.

The highest-rated EM digital payments shares have recently underperformed

We remain positive on the long-term growth prospects for the sector, and the transformative effect these companies can have on emerging economies. But investors will likely need to take a more discerning approach in future, and carefully weigh the trade-offs between growth, profitability and valuation.