Paytm announces buyback. Controversial step.

Paytm has announced buyback totalling maximum of Rs 850 crore @ maximum price of Rs 810/ share.

  • Buyback price is at 57% premium to the closing price on December 13, 2022 (before the announcement);
  • It will be an open market buyback;
  • Will be executed over a maximum period of 6 months;
  • Company’s directors and Key Management Personnel will not sell any shares during the buyback period;
  • At maxium amout and maximum price, buyback will represent 1.62% of the paid-up share capital of the Company as on March 31, 2022

Reason for buyback

Company says that due to the improving financial position and clear path to profitability over the foreseeable future, it has excess cash that it wants to use for the buyback.

In my personal view, buyback is more to try mitigate the current onging negative narrative, which led to it’s stock price correcting by 75% since IPO in November last year (IPO price was Rs 2,150).

Will it help in changing the narrative?

I doubt as buyback is confusing and is mired with controversies.

  • Buybacks are normally announced by profit making entities that can not find uses of excess cash for business growth.
    • Paytm doesn’t satisfy either – it’s loss making and being a new age tech company, ideally should have significant opportunities for growth.
  • Rules don’t allow IPO proceeds to be used for buyback.
    • Company is saying that it is not doing so and buyback will be funded through internal reseves. My confusion is – how does one differntiates between the two? Practically, I can call income to be internal cash proceeds and expenses to be funded through the IPO proceeds – does that sound reasonable?
  • Within 1 year the Company itself says it’s fair price has reduced from Rs 2,150/ share (IPO price) to now Rs 810/ share (buyback price).
    • This is despite it claiming to be having better business prospects now vis-a-vis then. Does it make sense?

Considering everything, I have no reason to believe that ‘buyback alone’ is any reason to get excited about Paytm.

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