Market Has Lost Faith In Paytm’s Ability To Monetise: Valuation Guru Aswath Damodaran

Valuation expert Aswath Damodaran has not shied away from speaking his mind on the current slowdown in the public markets and in particular, the inability of new-age businesses to meet their private valuations.  

In a blog post last year, Damodaran attributed the then ongoing mayhem in equity and bond markets and the implosion of cryptocurrencies to the pullback in risk capital. This is the capital set aside by investors for riskier investments in the hope of getting higher returns.

At the time, he predicted that the pullback in risk capital in 2022 was unlike the temporary pullback in 2020 and was more long-term like in 2000 or during the global financial crisis of 2008-09. And so far, many of these theories have proven to be on the mark. 

Known as the ‘Dean Of Valuation’, Damodaran also argued that the return of fear was healthy as VCs had become “lazy and sloppy” as they got easy returns for a decade. 

A professor of corporate finance and valuation at the Stern School of Business at New York University, Damodaran is considered an authority on private markets and business valuations for his simple insights and direct communication style.

Simply put, when he speaks, everyone listens. 

Speaking to Inc42, Damodaran shared his views on the Indian startup ecosystem, the state of tech companies on stock exchanges, and the funding winter and macroeconomic headwinds that have hit startups and big tech companies hard. 

“This is not just in India. Risk capital is retreating after a decade of excess across the world. This may be a healthy development overall,” Damodaran told Inc42 in a recent email interview.

The valuation guru spoke about his views on Paytm’s business model and its decision to buyback shares, Zomato’s acquisition of quick-commerce startup Blinkit, the upcoming disruption by fintech startups in the banking space, and much more. 

Edited excerpts

Inc42: Paytm’s market cap has fallen to about $4 Bn from its IPO valuation of about $19 Bn. What is your view on the company and also its recent buyback decision despite the heavy losses?

Aswath Damodaran: I think that the market has lost faith in Paytm’s management ability to monetise their users, and if the company is to make a comeback, it has to pivot from user growth to increasing the take rate. And a buyback by a young money-losing company is seldom a good idea, even if the company believes it is being undervalued by the market.

Inc42: One of the hot debates around the Paytm IPO was that retail investors don’t understand the business models of fintech startups which have various verticals. What’s your take on this?

Aswath Damodaran: It is actually a very simple model, at least for Paytm. Every time a transaction occurs on the platform, the company gets a percent of that transaction amount, i.e., the take rate. Paytm’s take rate is way too low to sustain their business model, and they need to raise that rate. All this talk of multiple verticals and user numbers cannot obscure that basic point…and they seem like distractions.

Inc42: Do you think the valuation metrics used traditionally involving future cash flows can be applied to tech startups that often go through slow growth periods? We see super high valuations despite a low revenue base and no path to profitability. 

Aswath Damodaran: If by valuation metrics, you mean pricing multiples, of course not. If by valuation metrics, you mean looking at a business’s cash flows, growth and risk, absolutely yes.

Inc42: There seems to be a huge difference in the way startups are valued in the private market and public market. There are also concerns being raised about overpricing of shares in the IPO. What’s your view on this dichotomy? 

Aswath Damodaran: By private market, I guess you mean VCs and they don’t value companies, they price them and so does the market. In some periods, the public market prices companies higher than the VCs (in most of the last decade). In some periods, the VCs price companies higher than the public market. 

[Speaking about BYJU’s] No one is valuing the company. Perhaps, it is time someone did. Stories without numbers risk being fairy tales.

In the near term after a public offering, companies are driven by traders, not investors. If you are investing in an IPO, be ready to be on a roller coaster.

Inc42: Let’s talk a little bit about Zomato and its decision to acquire Blinkit, which received a lot of criticism. The main concern was about Blinkit adding to the losses of Zomato, which has been somewhat allayed by the recent financials? How do you look at this acquisition? 

Aswath Damodaran: By itself, the Blinkit acquisition makes strategic sense since it buys Zomato growth, albeit with lower margins. That said, they paid a premium price for the company, and I believe that, at best, it is a breakeven investment for Zomato’s shareholders.

Inc42: The cryptocurrency and NFT mania seems to have hit a wall in the past year given the FTX debacle and more in the US. What’s your view on crypto as asset classes?

Aswath Damodaran: NFTs are collectibles, like fine art. The only problem is that it is not clear that the NFTs that people pay money for right now will be the NFTs that people will want in the future. 

As for cryptos, I think its advocates need to stop talking about how much money they have made trading them and start explaining what problems they solve more efficiently than existing currencies, and why they are more efficient at solving them.

Inc42: We saw relatively smaller IPOs in 2022 as opposed to 2021, Tracxn and DroneAcharya on the Indian stock market being examples. Is this trend set to stay? 

Aswath Damodaran: I don’t think you mean small listings, since the size of an IPO is based upon all of its shares outstanding. I think you are talking about small initial public offerings (that don’t look to raise big amounts). To me, it looks like these companies are less interested in raising capital and more in getting the right pricing and liquidity, which allows existing owners to cash out. 

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