Paytm's rightful valuation, once it lists on Indian stock exchanges, should be less than $20 billion given its inability to generate profits despite spending heavily to expand its product suite over the past 10 years, globally acclaimed equity valuation expert Aswath Damodaran wrote in a blog post.

Mapping out Paytm's financial pathway in a scenario in which it remains a dominant digital payments player for the next 10 years, Damodaran argues that even with favorable assumptions, a justifiable valuation of equity would be around $19.6 billion or Rs 1,45,600 crore.

Damodaran is a professor of finance at the Stern School of Business at New York University, where he teaches corporate finance and equity valuation. He arrived at the valuation using certain assumptions such as 40% annual growth in gross merchandise value (GMV) and 5% operating margins annually over the next two to five years.

“In making my assessment, I fully understand that there is substantial operating and execution risk in this story, since this value presupposes that Paytm will remain a dominant player in the Indian mobile payment space as it grows, and that Paytm's management will pivot from growing users to growing revenues and from growing revenues to growing profits, over time, with nothing in their history to back that up,” he said.

Damodaran, who has conducted detailed valuation analyses of high-profile firms globally, including food delivery firm Zomato, said that Paytm’s dominant position in India’s digital payments market coupled with its history of losses would widely split opinions on its rightful valuation.

“On one side, there will be some who view a value of close to $20 billion (Rs 1,50,000 crore) for a company with a pittance in revenues, a history of operating losses and distracted management as insanity. On the other side, there will be some who feel that I am not giving the company credit for all of the new businesses it can enter, using its vast platform of users, and thus undervaluing the company,” said Damodaran.

He added that a wide range of uncertainty in Paytm’s business model, and assumptions about its ability to maintain its dominance makes it a stock that should be bought with a certain degree of caution.

“Needless to say, if I invested in Paytm, it would not only have to be at the right price, i.e., trading at less than [Rs 1,50,000 crore], but also with the acceptance that this cannot be a passive (buy and hold) investment, but one that will require active engagement and monitoring of the company's actions and performance,” he wrote.

The assessment comes at a time when Paytm is planning to raise $2.2 billion from the public market in what is set to be India's largest IPO in more than a decade. The offer is expected to be launched by the end of this month or in early November. Paytm is learnt to be seeking a valuation of at least $24 billion, which could go up to $30 billion.

Damodaran, in making his valuation assessment of Paytm, takes into consideration several metrics of Paytm’s and India’s smartphone and digital payments growth over the past decade. He also assesses growth trajectories of various legacy and growth-stage global fintech companies such as Visa, Mastercard, PayPal, Square, Shopify and Ant Financial.

“The value story for Paytm starts with a large and growing digital payment market in India, one that has surged over the last four years, and is expected to increase five-fold over the next five years, as the smartphone penetration rate rises for India and more merchants accept mobile payments,” said Damodaran.

He listed four financial challenges which Paytm is likely to face once its stocks face public scrutiny. These are: a dwindling GMV in a company's revenue share, its ability to generate profits, performance of its reinvestments and acquisitions, and its cost of capital along with its cash burn rate.

“A few weeks ago, when I valued Zomato, I argued that it was a joint bet on the company's continued dominance of the food delivery market and the growth in the Indian restaurant/food delivery business. Paytm is also a joint bet on an early entrant into the Indian mobile payment market, continuing to maintain market share, in a growing digital payment market in India,” Damodaran said.