One97 Communications’ (Paytm) board will meet on Tuesday to consider a buyback proposal by the loss-making digital payments major. The proposal has taken the market by surprise as share buybacks are typically undertaken by profitable companies to return excess cash to shareholders.
“Buybacks signal that the company has strong cash flow generation, which is more than required to maintain the company’s growth trajectory. In Paytm’s case, the company continues to report cash losses annually. Therefore, the buyback is essentially a return of equity capital to its shareholders,” Institutional Investor Advisory Services (IiAS) said in a note.
The governance and voting advisory firm has highlighted three key issues, which it says Paytm’s board should answer before it green-lights the proposal.
“Why is the board considering a buyback at this stage? The company is yet to generate positive cash from operations. It is also yet to report profits — by traditional measures and not based on the company’s proposed profitability measures that exclude ESOP charges,” IiAS has said in a note.
The buyback proposal comes less than 13 months after Paytm’s disastrous listing, which saw its shares tank as much as 80 per cent. Through the IPO — the country’s largest back then — Paytm had raised Rs 8,300 crore by issuing fresh shares at Rs 2,150 apiece. The issue also comprised a secondary share sale worth Rs 10,000 crore.
“We expect that the board raised Rs 8,113 crore in net IPO proceeds after factoring its existing cash. Therefore, its growth strategy a year ago required funding support that was in excess of the IPO proceeds. What has changed for the board to believe that its current liquidity is sufficiently in excess that it can be returned to shareholders?” the voting advisory firm questioned.
The company planned to useRs 4,300 crore of its IPO proceeds for growing and strengthening Paytm ecosystem and another Rs 2,000 crore for investing in new business initiatives, acquisitions, and strategic partnerships.
“At the time of its IPO, the company announced its plans to undertake new initiatives. It is only once these initiatives are rolled out that the board can satisfy itself that the war chest is sufficient. Therefore, the board must articulate how it has determined that the post-buyback liquidity will be sufficient to meet the unexpected investments in these new initiatives,” IiAS said.
As on September 2022, Paytm’s cash and cash equivalents stood at Rs 9,186 crore. According to IiAS estimates, total cash with the company just ahead of its IPO in November 2021 stood at Rs 2,595 crore.
Shares of Paytm fell 3 per cent to finish at Rs 528 on Monday.