Paytm board must address concerns before buyback: IiAS

Paytm announced on Thursday that its board will consider a share buyback proposal on Tuesday, 13 December. Investors initially cheered the move – stock surged 7% on Friday morning. On Monday, shares closed at ₹529.6 apiece, down 2.75% despite the company reporting robust loan growth of 150% for November.

Broadly, shares are down 75% since its November 2021 IPO issue price of ₹2,150 per share.

Paytm had reserve cash of ₹9,182 crore as on 30 September, 2022, however, it cannot use its IPO proceeds for the buyback according to the regulations.

“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 companies proposed profitability measures that exclude ESOP ( Employee Stock Option Plan) charges,” IiAS said in its note .

Secondly, the IiAS note says that a year ago, Paytm had required funding that was in excess of its net IPO proceeds of ₹8,113 crore. At the time its growth strategy required funding support in excess of IPO proceeds, the firm said. “What has changed for the board to believe that its current liquidity is sufficiently in excess that it can be returned to shareholders?,” IiAS said.

Further, unless the buyback price is over ₹2,150 apiece, this buyback is also likely to benefit its pre-IPO and employees more than investors who came in during and after the IPO, the advisory firm said.

IiAS also said that Paytm board must articulate how it intends to roll out new initiatives announced at the time of the IPO and if the post-buyback liquidity will be sufficient for those initiatives.

“At the time of its IPO, the company had 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,” the note said.

Paytm board will meet today to vote on the buyback proposal. The exact contours of the buyback deal are not yet public.