Paytm’s share buyback plan leaves its investors surprised

Bloomberg

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, was expected to decide on the buyback. 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, some 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.
“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 the buyback to work, the company may need to pay 30%-40% premium over current price. Otherwise, it may not serve the purpose.”
Paytm’s shares were up 1.9% in Mumbai, taking their gains since the buyback announcement to 6%.
“While tabling a proposal for a buyback, the company has ensured that there is surplus liquidity, which means that all cash requirements are adequately budgeted,” Paytm said.
“The management is confident of strong operational performance and remains focused on building long-term value for its shareholders.”
Buyback Size
Indian firms cannot use money raised from an IPO to fund a share buyback, the company had said earlier. Any buyback, if approved by the board, will be done using cash on the company’s books, it said.
Rahul Jain, an analyst at Dolat Capital Market Ltd in Mumbai, estimates the appropriate size of a buyback at about 8 billion rupees ($97 million) to 10 billion rupees. Paytm would likely buy the shares on the open market, he said. Sell-side analysts have turned more positive on Paytm’s stock in recent weeks.
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.