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The biggest initial public offering (IPO) in India’s history has not panned out as many investors had anticipated. Indeed, shares in financial technology company One97 (NSE: PAYTM) slumped by over 20% on their first day of trading.

Since then, shares in the parent company of India’s largest mobile payments and commerce platform, Paytm, have fallen further before partially recovering. However, they remain more than 10% below their 18 November IPO price.

In the short run, further heightened volatility seems likely. But, on a long-term view, could the company’s recent share price decline make it an increasingly attractive opportunity?

India’s growth opportunity

Major investors in One97 include Softbank, Alibaba and Berkshire Hathaway. They are likely to have been drawn to the business by its long-term growth opportunities as India’s economy expands at a rapid expected rate.

In fact, the country’s GDP is forecast to deliver stunning growth over the next five years. The IMF currently expects that India’s economic output will be 52% greater in 2026 than it was in 2020. To put that into perspective, the US economy is expected to become 20% larger over the same period. Meanwhile, UK GDP is forecast to grow by 19% between 2020 and 2026.

Growth strategy

This high rate of growth in India’s economy is already translating into opportunities for Paytm’s payment platform. Indeed, the value of mobile payments in India increased by 67% to $478bn in 2020.

Paytm’s growth strategy has focused on attracting small businesses to its payment platform. As a result, the number of merchants using its platform nearly doubled between March 2019 and June 2021. In addition, the company has diversified into other areas including a wealth and investment advisory marketplace that could provide ancillary growth opportunities.


What are the potential threats for Paytm?

However, the upbeat outlook for India’s economy and the country’s growing payments sector has attracted significant competition. For example, Facebook owner Meta and Alphabet’s Google are seeking to increase their market share as demand for mobile payments rises. Their capacity to cross-sell to existing customers, as well as their significant financial strength, may lead to more limited growth opportunities for Paytm in future.

In addition, the introduction of the Unified Payments Interface (UPI) in India could limit the potential for payment providers to differentiate themselves from one another. The UPI system allows money to be easily and safely transferred between bank accounts using a mobile phone. Moreover, Paytm’s move into areas other than transaction services, such as the aforementioned investment advisory marketplace, may present new risks and less reliable revenues.

Can we expect further wild swings in the Paytm stock price?

Since IPO stocks have historically been relatively volatile, it seems likely that One97’s shares will exhibit further wild swings in price over the coming weeks. As such, it may be prudent to adopt a wait-and-see approach towards the company’s shares.

Clearly, the Indian economy has significant growth potential over the coming years. This could create opportunities for payment platforms that may catalyse their financial performance.

However, the threat from heightened competition remains a major risk facing Paytm. It is competing against some of the world’s largest firms, which could squeeze its sales growth and profitability in the coming years. As such, its risk/reward opportunity does not appear to be particularly favourable at the present time.

Related

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Robert Stephens

Robert Stephens

Robert Stephens is a CFA Charterholder who has around 15 years’ experience working in the financial services industry.

The vast majority of that time has been spent working as an Equity Analyst, with a focus on FTSE 350 shares in the consumer goods, consumer services and retail sectors.

He has also contributed to a wide variety of media publications on a freelance basis, including The Telegraph, What Investment, Master Investor and Citywire.

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