Reverse compounding!

So with today’s fantastic run, Paytm is down to around 38k crore market cap or roughly $5B in dollar terms. So from IPO price, it’s down over 72% and is possibly one of the fastest minus 1l crore market cap in India’s history. This also values it the same when it raised money back in 2016. So anybody who came and put money in its subsequent funding series is underwater. This my friends is called reverse compounding and is deadlier to your networth than you can imagine. See – https://zerotomillion.business.blog/2021/05/26/dont-buy-junk/

First, my views on Paytm and its siblings have been consistent all through its journey to hell- see a link to an earlier blog , written in November ( https://zerotomillion.business.blog/2021/11/19/paytm-mat-karo/)

Second, in addition to what I wrote as to these fintechs are trying to achieve through cross selling and data selling is somehow be able to lend money by becoming a Bank or an NBFC or even an SFB. Now let’s put this to my logic test.

In India, who goes to avail loan from a paytm or likes? The one who won’t get a penny from his family as this fellow trying to avail 1l or 50k personal loan has basically no to little income, has no intention or inclination to manage personal finances well or else they won’t need this money in the first place and also, have little by way of a decent credit score or else their own banks would have extended similar loans at much better rates. These are people trying to fund an iPhone, or a Thailand trip or other fancy stuff which they certainly can’t afford in a better world. They’re like the infamous NINJA- No Income, No Jobs and No Assets loans in US which fuelled the fire once housing went bust.

Now lending is inherently a risky business as you’re never sure if your money will come back on time, if at all. On top of it to extend loans to such class is a sure shot recipe to disaster. Now let’s extend this logic. Even if they go on and extend enough loans somehow and acquire an NBFC or a Small Finance Bank license which in itself is far fetched, considering the myriad corporate scandals which keep coming out, they will be valued to price to book basis. The premium Banks like HDFC and ICICI trade at 3-4x price to book( equity book, not loan book) and extremely premium NBFC like Bajaj Finance traded at 8x Price to Book. So at max these companies can trade at similar levels. Now here’s the catch- thanks to the accumulated losses on the way,the moment they turn to profits, their capital will erode in order to clean up the mess. And that will make book value at max Zero from negative. And in such case, their price to book at whatever level will make the price, well, ZERO!

So even if they turn victorious in their Gods work they claim to be doing, the share price is eventually going to be zero.

Here’s my takeaway- one Yes Bank or Jet Airways or a Paytm a year or two can turn all your gains vanish and portfolio returns negative. So avoid junk, even if it’s for free. The first principle to make money is to avoid losing it. Say no to ideas which makes no sense and are just fancied in the markets.

( https://zerotomillion.business.blog/2021/06/12/art-of-saying-no/ makes similar points)