The undervalued valuation of Paytm, once it is listed on the Indian stock exchanges, given its inability to generate profit despite incurring huge spending to expand its product suite over the past 10 years, has led to globally acclaimed equity Valuation specialist, must be less than $20 billion. Aswath Damodaran
wrote in a blog post.

start measuring PaytmFinancial Route in the scenario to remain a major digital payments player for the next 10 years, Damodaran argues that with favorable assumptions, the fair valuation of the equity would be around $19.6 billion or Rs 1,45,600 crore.

Damodaran is a professor of finance at the Stern School of Business at New York University, where he teaches corporate finance and equity valuation. He arrived at the valuation using certain assumptions such as a 40% annual increase in gross merchandise value (GMV) and 5% operating margin annually over the next two to five years.

“In making my assessment, I fully understand that this story carries substantial operation and execution risk, as it assumes that Paytm will continue to be a major player in the Indian mobile payments space, and that Paytm’s management lags behind growing.” From growing users and increasing revenue to increasing profits, over time, there is nothing in their history to support that,” he said.

Damodaran, who has conducted a detailed valuation analysis of high-profile firms globally including food delivery firm Zomato, said that
Paytm’s dominant position in India’s digital payments market and its loss history Opinion will be widely divided on its correct evaluation.

“On the one hand, there will be some who look at the value of close to $20 billion (Rs 1,50,000 crore) for a company that has revenue, a history of operating losses and deviant management in the form of madness. On the other hand, there will be some who feel that I am not giving credit to the company for all the new businesses that can make use of its huge platform of users, and thus undermine the company,” Damodaran he said.

The wide range of uncertainties in Paytm’s business model, and assumptions about its ability to maintain dominance, make it a stock that should be bought with some degree of caution, he added.

“Needless to say, if I have invested in Paytm, it should not only be at the right price, i.e., trading less than that. [Rs 1,50,000 crore], but with the acknowledgment that this cannot be a passive (buy and hold) investment, but one that will require active participation and monitoring of the actions and performance of the company,” he wrote.

Evaluation comes at a time when
Paytm plans to raise $2.2 billion from the public market Going to be India’s biggest IPO in over a decade. The offer is expected to launch by the end of this month or in early November. It is believed that Paytm wants a valuation of at least $ 24 billion, which can go up to $ 30 billion.

Damodaran, in its valuation assessment of Paytm, takes into account several metrics of Paytm and India’s smartphone and digital payments growth over the past decade. He also assesses the growth trajectory of various legacy and growth-stage global fintech companies such as Visa, Mastercard, PayPal, Square, Shopify and Ant Financial.

“The value story for Paytm begins with a large and growing digital payments market in India, which has grown over the past four years, and is expected to grow five-fold over the next five years, as the smartphone penetration rate for India increases. More merchants accept mobile payments,” Damodaran said.

He listed four financial challenges that Paytm shares are likely to face after facing public scrutiny. These are: the declining GMV of a company’s revenue share, its ability to generate profits, its reinvestment and acquisition performance, and its cost of capital as well as its cash burn rate.

“A few weeks ago, when I valued Zomato, I argued that it was a combined bet on the company’s continued dominance in the food delivery market and growth in the Indian restaurant/food delivery business. Paytm Indian mobile payments market,” said Damodaran. It also has a joint bet on early entry into the U.S., which continues to maintain market share in the growing digital payments market in India.

“That said, the companies have very different business models, with Zomato accounting for 20% of every dollar spent on its platform-plus tech is less than 1% of every dollar spent on Paytm’s own platform. They both There are big market bets, but Paytm is heavily dependent on bet management, which is finding a way to grow while improving rates at the same time,” he said.