Paytm’s plan to buy back shares has left investors surprised and worried about the loss-making Indian fintech firm’s growth prospects as it uses funds to prop-up its hammered stock.
The board of One 97 Communications Ltd., the listed-entity that runs Paytm, will decide on the buyback on Tuesday. The move comes as the stock has plunged about 75% since its listing last November to emerge as the world’s worst-performing large initial public offering in a decade. The slump also prompted a unit of Japan’s SoftBank Group Corp. — a key backer — to trim its holding.
While a buyback could help stem the rout in Paytm shares at least temporarily, investors are questioning the attempt to manage the stock price rather than putting the cash to use for business. The company, India’s leading digital payments brand, last month posted a wider second-quarter loss.
“There is little merit in bucketing cash this way,” Institutional Investor Advisory Services India Ltd., a proxy advisory firm, wrote in a note on Monday. Unless the shares are repurchased at more than 2,150 rupees apiece — the price at which they were sold in the IPO — the buyback will favor only Paytm’s pre-IPO shareholders and employees, it wrote.
Paytm’s shares rose 1.6% in early trading in Mumbai, taking their gain since the buyback announcement to almost 6%.
Indian companies cannot use money raised from an IPO to fund a share buyback, Paytm said in an emailed statement. Any buyback, if approved by the board, will be done using cash on the company’s books, it said.
“Stock buyback is a strategy play for Paytm because the share price has seen sharp erosion,” said Karthick Jonagadla, the founder of Mumbai-based Quantace Research. “For buyback to work, the company may need to pay 30%-40% premium over current price otherwise it may not serve the purpose.”
Touted as India’s largest-ever IPO at the time of its listing, Paytm’s offering attracted traditional global stock pickers such as BlackRock Inc. and the Canada Pension Plan Investment Board. Shares were sold at the top of a marketed range as the deal attracted strong demand from individuals and funds, although they never traded above the listing price.
Helped by gush of global liquidity, India’s then booming IPO market saw strong investor appetite for other consumer technology companies as well — including online food delivery firm Zomato Ltd. and beauty products retailer Nykaa — despite questions over their profitability and valuations.
With shares of these companies coming under pressure following the global meltdown in the technology sector, a number of their early backers have exited or trimmed stakes.
“It is unclear if the size of the buyback will be sufficiently meaningful to move the needle” for Paytm, the proxy advisory firm IiAS wrote.