Post

Anurag Singh

Nov 8, 2021 • 25 tweets • 11 min read • Read on X

Scrolly

#PayTmIPO – Long Thread:
There is a new game in town. The rules are “well laid out” by VCs – Report just 3 yr financials, blame flat sales since 2019 on covid, pick consultants to project fancy story, price IPO at 45 times sales, create scarcity of “limited offer” of 12% shares”

12% stake sale ~matches the “principal investment” by VCs. Oh, by the way, get some tranches of funding just before IPO that values your company closer to issue price. It’s like you buying your own house again for 2x price. May not work for you but somehow seems to work for VCs.

Now rope in mutual funds with 75% of this scarce offering (SIP money will go somewhere after all) & leave retail scrambling for 2.5% stake of a brand that is now a “household name”. Get brokerage firms & YouTube advisors to keep pumping story with same broken records from DRHP.

Vola ! You have launched a successful IPO. With principle off the table, you still have 88% ownership to be gradually transferred overtime to domestic mutual funds, riding on retail (other peoples) money.
They say “a fool & his money will always be parted”.

Everyone rewards excellence & those are rare. Internet is about winner takes all, where one or 2 players dominate the entire industry.
But who rewards mediocrity? Well, enter #PaytmIPO. If Infosys & TCS were a bet on excellence, Paytm is a bet on mediocrity. We’ll see how.

Before we get to business model, see the valuation ladder where owners keep valuing their own property & higher rates.
But there is a catch here – Paytm seems to have got the last funding in 2019 at $ 16 Bn valuation. On that, the current pricing at $ 20 Bn seems fair, isn’t it?

Hmm….it’s easy to draw this conclusion unless you notice that this funding came in Nov 2019. Why is this critical? The world didn’t know about Covid.
Something tells me that the IPO was planned for 2020. But then Covid stuck in March 2020. No IPO happens in a bear market. Oops!

So here we are. #PaytmIPO asking Rs 18,300 Cr ($ 2.5 Bn) valuing the company at 1.5 lac Cr ($ 20 Bn). That puts Paytm in the league of top 25 cos, well almost.
If Paytm doubles from here, it will be bigger than Axis bank & close to Kotak bank.“Super app” bigger than these banks?

You’ll say, well #Paytm has potential…..right ? Well, the revenue is all of Rs ~3200 Cr & has stayed stagnant since FY19. Also almost entire loss reduction (Rs 1500 Cr loss in FY’21) comes from reducing promotional expenses. (Remember 2020 planned listing)

But we need to dig more on revenue sources. #Paytm is largely in 2 clusters – Financial services & eCommerce. Revenues from payments (& fin svcs) grew, albeit at 33% for last 2 yrs whereas “eCommerce & cloud” biz is falling substantially, indicating that this segment is declining

What was “eCommerce & cloud” biz? Remember Paytm Mall eCommerce biz which was to take on Flipkart & Amazon?
Then there is ticketing biz, again trying to compete with the biggies already established in ticketing. We see new segments tried & folded without significant leadership

Sometime in 2020, Paytm decided to be a financial super app v/s competing on eCommerce. It earns brokerage fee from banks/NBFC/Insurers for loans, cards, insurance, etc. In a captured space, it is just new entrant. As quoted “financial svcs revenue is small % of our revenue”

Do you want to pay for yet another shot at diversification in spaces that are crowded, given failed experiments ? How much can an app cross-sell?
While industry is worried with too many stocks trading accounts, Paytm has barely started.What leadership execution do we value here?

Brings us to the much talked about payments bank. Banks make money largely by lending, but these banks can’t lend. So how strong is this entity? Co says ~6 crore accounts. With “deposits” of Rs 3200 Cr that works to Rs 500 per account! Is this where money will be made?

Paytm payment bank makes Rs 2100 Cr topline. 70% transactions in payment bank come from not the bank customers but via Paytm itself.
Look at related party tranx disclosed in DRHP: Paytm pays Rs ~900 Cr revenue to its payment bank, which is owned 51% by promotor VSS. Hmm…okay!

You see why such maze of cross ownership & 38% direct Chinese stake doesn’t inspire confidence for banking biz.
No wonder the small bank & insurance licenses are lying with RBI & IRDA for over a year. Post IPO, “Ant fin” stake will fall <25% but is that good to inspire trust?

Finally, let’s examine the core of #Paytm on which the super app is built. The payments business that claims 330 Mn “users”. However active user number drops to ~50 Mn that has been stagnant.
330 Mn “users” means 33 Cr people have tried Paytm at some point but haven’t adopted it

Is Paytm a household name – yes, of course. When you have 33 Cr users in a country of ~25 Cr households, almost everyone knows you. But only 15% of those are real users. There is no more adoption now. You know what killed it? See graphic – Paytm has just 12% share on UPI tranx.

@Tijori1

See the trend below (data by @Tijori1 ) which clearly indicates that digital payments market which was actually “disrupted” by Paytm is going the UPI way while elite segment is always grabbed by credit cards. A comeback in any of these categories by #Paytm looks very difficult.

You know what it does to #Paytm business? While DRHP displays some near term rise in spends, real issue is lost in the text below.
Since UPI dominance increased, Paytm is forced to reduce “take rate” it charges merchants (0.64%). Paytm revenues are falling despite rising spends!

Want to value the company with all this context? Let’s give it a shot. If #PayTmIPO is trying to be #PayPal of India (inspired, to say the least), the comparison is imminent. I’ve tried some high-level metrics below:

They say, when you buy something, look at "who is selling". TCS listed in 2004 at 24 P/E & yielded returns of 28% CAGR for next 15 yrs. The sellers for #PayTmIPO are Ant Financial (Alibaba) & Softbank (of We Work IPO fiasco), not best known for their financial integrity.

Conclusion: Digital businesses are about 1 or 2 winners taking all mkt. I see Paytm losing fast to UPI, GPay, Amazon & WhatsApp pay (likely). I also see an effort to be a super app for other financial brokerage areas where it has no moat & there are leading incumbents already.

Paytm folded fast against Flipkart & Amazon in marketplace. We don’t see those buried ventures in the timeline below. Its competence in financial svcs is limited & banking is not easy to disrupt, yet. Financial svcs are all about trust. Would you make a fixed deposit with Paytm?

Amazon & Flipkart inspire excellence,Paytm looks like mediocre also ran in a space dominated by giants. With dreams bigger than its financials, #PaytmIPO is asking valuation at ~65% of Axis bank, ~40% of Kotak & 20% of HDFC bank. If your mutual fund buys this IPO, stop that #SIP

• • •

Missing some Tweet in this thread? You can try to force a refresh

More from @anuragsingh_as

Anurag Singh

@anuragsingh_as

Mar 30

LONG POST: #EconomicTimes article
Why does the India bull look tired?

Over the past week, Indian equity markets are up almost 2% with the Nifty trending at 23,589. Retail investors are happy and renowned experts are going out and claiming it to be the ‘start of a new bull run’. However, there are a few who feel the next 10 years will be different from all the past boom periods that India has witnessed so far.

In the past two decades, the #Nifty50 has returned 12% annually. Smart investors believe the country can do far better than this number in the coming decade. But markets are cyclical in nature. There is a high chance that we might actually get lower annual returns compared to the past.

Markets have had a sizeable correction from the highs seen in last September peak. It has been a painful grind in the last six months for investors. For nearly 80% of them, the correction is somewhat a new phenomenon, and totally unexpected. These new investors had come in for linear returns and were trained to ‘buy the dips’. They had the best for the past 5 years, up until now.

When the story was about demographic dividend and companies rising to fulfill the unsatiable demand from young India, why should that come to a halt? Why do stocks correct after all when the going is so good? And why would foreign investors want to leave in such a hurry?

All great questions. For those who started after 2020, there are some valuable lessons to learn here. Well before they prepare for the next bull run.

What was driving the rise?
When you buy a stock, you buy a share in its earnings. The earnings per share (EPS) decides the price it should trade at (at least some of it). The other element comes from the market sentiment, which relies on future prospects for the current earnings. What India witnessed last five years was the boost on both these elements. Let us look at earnings first.

Nifty EPS was around INR430 by end of 2019. During the next 4 years, by the end of 2023, it rose to INR950. That is an astounding CAGR of 22%. If you looked at the historical 10-year trend till 2019, the range was much below 10%. This earnings surprise increased valuations. Common sense would tell you that Nifty should double too. And it did. From 12,500 to neat 25,000 rise was largely justified. At least in theory!

If we broaden this story and look at the entire listed corporate space, corporate profits jumped from around INR4 lakh crore (USD45 billion) to INR16 lakh crore (USD170 billion) during the same duration. This was nearly 4.8% of GDP. No wonder, we saw a bump in valuations across Nifty 500 Index.

Markets assumed the similar rate of growth and priced the stocks accordingly. Not to forget, the flow of domestic money to mutual funds provided more gas to stocks outside of Nifty 50. The mid- and small-cap stock prices grew significantly higher, at almost 30% CAGR for 4 years. This was far in excess of the EPS growth in these stocks.

This super growth phenomenon however is always shortlived. We’ve had these phases before. There is nothing new about this.

Look at the above chart for corporate earnings to GDP ratio, which is a very reliable indicator of how well the listed market is doing within the larger economy. We see that corporate earnings grew from 2.1% of GDP to 4.8% of GDP between 2020 and 2024. However, we can also see a similar rise to peak between 2003 and 2008, after which a period of slowdown began till 2019. While this doesn’t imply that the path will exactly be the same now, the key message is that earnings are cyclical. And so is the Indian economy.

Why did the markets fall and why now?
Though the market had accounted too much exuberance in 2024, it failed to recognise this EPS growth was never sustainable.

So, why did the earnings spike post 2020?
A confluence of factors resulted in earnings growth post 2020. Firstly, banks’ balance sheets were already clean after years of NPA write-offs post 2014. After pandemic, we had a sudden demand surge — IT services got huge demand boost from US, there was discretionary revenge spending by consumers & finally the govt capital expenditure increase 4 times to INR11 lakh crore (USD125 billion). All of this happened within 3 years. Indian retail credit penetration increased from 20% of GDP to 43% of GDP. So much of the consumer spending was done with credit binge too.

All that spending is behind us now. So, unless you have a reason to believe that the economy has drastically improved after 2020, it is safe to assume that the earnings growth will also correct. And this is already underway since 2024. Estimates for Nifty 500 companies is at 7% topline growth. This is just about keeping up with inflation.

For context, look at the topline growth for #Nifty500 companies below. It tells a similar story since 2010 where sales growth slowed after 2009. And then the huge spike after 2020.

While sales growth slowed by 2022, margins expanded, which concealed the slowing topline. That provided some cushion to the EPS story for a year. However, EPS can’t grow continuously if topline stagnates.

When will markets capture previous peaks?
Depends on your outlook on earnings and India’s economic growth. It is worth noting that after 2009, corporate earnings grew at single digits for next 10 years. Nifty 50 and Nifty 500 returns were in the range of 8% and 7%, respectively for the next decade.

The situation was not exactly the same then, and reasons may be different now. But the economy does go through a period of moderation after every exuberant cycle. So do markets.

The current correction should not be seen as a minor blip that recovers fast. It is unlikely to be a V-shaped recovery because it is not driven by a special event. It is a sales slowdown which has been in the making for 18 months now. Just that the earnings took some time to reflect that.

Thus, the recovery may take as much time as it takes for the consumer to recover. Also remember, the market slowdown impacts gross spending levels too. If you don’t have stock buoyancy, you are unlikely to buy bigger homes or take that exotic holiday. As government tries to contain fiscal deficit from 4.8% to 4.4% of GDP this fiscal year, the spending boost from the Centre may become difficult.

With history, it is safe to assume that junk stocks will not gain the glory they did. But eventually, markets do recover if the economy continues to march forward. That is the key here. If the GDP growth stays in 6% range, corporations will figure out a way to come out of the earnings stagnation. And some new winners will emerge.

My sense is that next 5 years may be a period of moderate growth in #India , wherein market absorbs the current high valuations. They may appear cheap on current earnings but are probably not accounting for likely slower growth in future.

Eventually, the returns from Nifty 500 are likely to be around 10% for the decade between 2021 and 2031. So, you will be fine as long as your portfolio is well balanced. Ignore the noise and get back to work. If you were expecting this to be a linear rise, then that assumption was never right to begin with.

One last thing
The comparisons that forever bullish gurus quote from US markets don’t apply to any other country. If you pick a historical point from US markets, you can prove almost anything. India story works differently too, unless the economy undergoes a drastic transformation, something like China had for last 30 years. While that is possible, it is also extremely rare.

And this is exactly where the bulls and the bears begin to differ substantially. You can take your pick. The perma-bulls continue the story of India imitating China growth. The story has been alive for 25 years now. Evidence and experience do not justify this thesis.

A healthy dose of realism is always good in investing. Else, you end up buying expensive con stories from faceless sellers who get rich with your money. Some of you may have realised that by now.

The India bull ran fast as it could. But it needs some well-deserved rest. Let it rest for now.

The chart is “corporate earnings to GDP”. Pls ignore the header. Numbers are fine.

Corporate Earnings to GDP over the years

Read 4 tweets

Anurag Singh

@anuragsingh_as

Feb 14, 2024

Follow up Thread 🧵: Farmers Protests:
They’re back!
If Karl Marx were to hear about the farmers protests today, there is a chance that he would be back too. Just like the farmers are back with the same old MSP demand, that is not only un-justified but unethical too.#FarmerProtest2024

See the picture above Does the farmer in the picture needs a govt subsidy or support?
The gentleman circled in red is a typical rich farmer. What about those circled in blue, that are almost forgotten in background. Now who needs govt support? Who needs the MSP?

Marx would define these farmers as classic “Bourgeoise” that us “Proletariats” should fight against. But there is something that either motivates them or keeps them dis-satisfied.
What forces the wealthiest (Yes) ones to come out, protest for higher prices for farm produce?

Read 26 tweets

Anurag Singh

@anuragsingh_as

Jan 30, 2024

Short Thread: HDFC BANK
Why are the FIIs selling the largest bank?

A classic case of different paradigms – You have a framework of valuation & begin to wonder why the world is not getting it? There are 2 options – Either understand the other paradigm or change yours. #HDFCBank

I’m not sure if you will change your valuation framework. But at the end of this post, you will definitely understand why FIIs may be selling.
I’ve always been perplexed by this comparison that I’ll share now. Let's take a quick dive -

Book size:
Look at the top 3 US banks that collectively control 45% of assets & lending amongst US banks. Compare the size & scale.
HDFC bank is appx 1/10th of a Bank of America(BOA) in assets. JP Morgan is 12x & Wells Fargo is 6x of HDFC in assets.

Read 15 tweets

Anurag Singh

@anuragsingh_as

Dec 27, 2023

LONG THREAD: SBI Cards IPO Follow-up:
Revisiting the #SBIcards IPO thread (Mar-2020). IPO price - 755, price today - 768.
In Mar'20, I quoted "They say market is a great teacher. If this one makes money for investors, I definitely would have missed some lecture in investing".

Well, looks like some of us did learn something. Markets at all time highs, SBI cards is still flat since 3 years. I don’t want to sound arrogant claiming victory. We are all learning here. So let's revisit what SBI cards promised (or implied) & what it delivered. Here we go -

Cards in force & spends:
We see glossy numbers again in FY23 annual report: 22% YoY growth in cards,30% YoY in receivables. What is the benchmark? Is it good enough vs IPO projections? Why are the graphics starting from 2019, exactly when the pre IPO disclosures end ????

Read 21 tweets

Anurag Singh

@anuragsingh_as

Sep 19, 2023

LONG THREAD: Golden Era for Indian Equities - Behind or Ahead ?
As Nifty crossed 20K, time to take stock of what returns to expect in future?
Examine the journey so far & a critical analysis on CAGR returns which are not quite the story we’re sold. Let’s go for a ride:
1/n

We’ve all heard this story. Had you invested in Sensex at inception in 1979, you got 660x returns, CAGR of ~17% . Simple math- Sensex started at 100 & now is hovering at 66,000.
If only making money was that easy. Argument is not that strong if we scratch below the surface.
2/n

I’ll make an effort to validate if there is more to this story than meets the eye. And there is.
As most funds like to present the market returns since inception in 1979, it is important to see the Indian stock market history in 4 distinct decades.
3/n

Read 25 tweets

Anurag Singh

@anuragsingh_as

Dec 23, 2022

@EconomicTimes

The golden era of Indian stock markets - Behind or Ahead of us?

My piece for ⁦⁦@EconomicTimes⁩ analysing Indian markets since inception in 1979.

economictimes.indiatimes.com/prime/money-an…

I’ll post a thread later if you can’t read behind the paywall.

Here is the detailed article in 10 tweets thread if you were unable to read behind paywall -
1/10

Read 13 tweets

Share this page!

Enter URL or ID to Unroll

Anurag Singh

Try unrolling a thread yourself!

More from @anuragsingh_as

Anurag Singh

Anurag Singh

Anurag Singh

Anurag Singh

Anurag Singh

Anurag Singh

Did Thread Reader help you today?

Don't want to be a Premium member but still want to support us?

Send Email!