Aswath Damodaran says Paytm not a buy-and-hold investment, values it at $20 bn

Damodaran, also renowned as the Dean of Valuation, in his latest blog post said the

company should be valued at Rs 1,45,671 crore, or $19.60 billion. As per this, its existing shares should be valued at Rs 2,190.24.

This is at a 26 per cent discount to the prevailing price range of Rs 2,900-3,000 at which the shares are trading in the grey market. There are some indications that the company could price its issue anywhere in the Rs 3,150-3,800 range.

“If I were to invest in Paytm, it would not only have to be at the right price, i.e., trading at less than Rs 1,500 billion, but also with the acceptance that this cannot be a passive (buy and hold) investment, but one that will require active engagement and monitoring of the company’s actions and performance,” Damodaran, Professor of Finance at the Stern School of Business at New York University, wrote.

His assessment of the company’s value is closer to $20-22 billion, which is similar to the valuation that sovereign wealth funds (SWFs) and foreign institutional investors (FIIs) are giving it ahead of the IPO.

Damodaran said almost all of the value of Paytm comes from expectations of the future, and there is significant uncertainty in every single dimension. Hence, the estimate may also have variations, depending on how you value its future.

“Even if you strongly favour the company and find it undervalued, it would be hubris to concentrate your portfolio around this stock. In other words, this is the type of stock that you would put 5 per cent, or perhaps 10 per cent, of your portfolio in, not 25 per cent or 40 per cent,” he said in his blog.

Paytm is one of the oldest and most successful fintech players in India. The market is still evolving and there is immense scope to grow. However, it is also a fact that it is yet to deliver a single rupee of profits.

“The growth in the Indian mobile payment market will provide enough of tailwind for Paytm to continue to grow its user base and transactions, but the bigger challenge for Paytm will be on the business dimensions where it has lagged in the past,” Damodaran said.

He counted declining take rate, which is among the lowest among its peers, and deep negative operating margin as its key challenges.


Comparison with Zomato

Zomato was another company Damodaran valued recently. He argued that it was a joint bet on the company’s continued dominance of the food delivery market and the growth in the Indian restaurant/food delivery business.

Paytm is also similar in some sense, but there are big differences as well.

“Paytm is also a joint bet on an early entrant into the Indian mobile payment market, continuing to maintain market share, in a growing digital payment market in India. That said, the companies have very different business models, with Zomato’s 20 per cent plus take of every dollar spent on its platform vastly exceeding Paytm’s less than 1 per cent take of every dollar spent on its platform,” he said.

“They are both big market bets, but the Paytm bet is much more dependent on the management figuring out a way to grow, while improving take rates at the same time,” he said.