Valuation, not just war, may have delayed Walmart-backed PhonePe’s IPO plans

A mismatch in valuation expectations, apart from market volatility arising out of the Israel-Iran war, may have led Walmart-owned PhonePe to defer its India listing, per sources.

The payments major said on March 16, deferred its Initial Public Offering (IPO) citing market volatility and the West Asia war.

However, multiple investors Moneycontrol spoke with said that a valuation mismatch also played a role in PhonePe’s call to pause the IPO process.

In its discussion with domestic mutual fund houses,the number being suggested was the mid to upper end of $6-$8 Billion, with recent conversations around $7 Billion. This was half of the $15 Billion valuation that PhonePe was pegged at in its last private round of funding.

PhonePe denied that valuation concerns had any role in the company pausing the IPO process.

“We paused the process only because of the current market conditions, which are unrelated to PhonePe. Any allusions to the pause being related to PhonePe-specific issues, such as valuation, are baseless,” PhonePe said in an official statement to Moneycontrol.

The comparison with Paytm

PhonePe received Sebi approval for its IPO on January 20 and has until May 2027 to complete the listing. PhonePe’s main rival and listed payments firm Paytm is currently valued at around $7.5 billion, while both companies have similar revenue.

Several analyst reports published since the company’s draft red herring prospectus (DRHP) have pointed out that Paytm is ahead of PhonePe in its monetisation journey.

“Paytm is ahead in its monetisation journey with a more diversified business mix, and better margins,” a BofA Securities report published earlier this month said.

Several research reports from analysts compared PhonePe's dependence on payments for around 85 percent of its topline.

Dominant player in UPI

PhonePe’s high asking valuation comes from its dominance of the mobile payments landscape with a 45 percent share of UPI transactions, followed by Google Pay at 35 percent and Paytm 7 percent.

More than 85 percent of the country’s digital payments are processed by the UPI platform. PhonePe processes close to 10 billion transactions worth over Rs 12 lakh crore a month.

The company continues to hold sway with its customers, even as UPI continues to see new entrants with deep pockets. The continued growth of the UPI platform, along with newer use cases and strong innovation, makes UPI an unrivalled platform for digital payments in the country.

“In consumer lending, we see room for PhonePe to emerge as one of the dominant platforms in the space, given its access to data and reach of 30 crore active users,” BofA report said.

Lack of profits

However, over the last three years, public markets have favoured new economy startups with profitability and PhonePe’s relatively high employee stock ownership plan (ESOP) costs have been a cause for concern for investors.

“ESOP payments for PhonePe are higher than all new-generation companies. This is the main component causing a drag on EBITDA margins,” Macquarie Capital said in a report published in February.

The analyst reports also flagged the impact of discontinued businesses, such as rent payments and the real-money gaming ban on PhonePe’s revenue for the current financial year.

“While we see long-term potential in monetising PhonePe's consumer engagement, we believe that Paytm offers a more favourable risk-reward, given PhonePe's weaker profitability profile and high valuation ask,” Emkay report published late last month said.

While none of the investors questioned PhonePe’s potential to raise its revenue, the current asking valuation has been deemed high by several investors.

Lending key to growth

Most of the revenue growth for the payment companies have to come from lending distribution. PhonePe’s revenue from the vertical stood at Rs 300 crore during the first half of the current fiscal.

“The company has to grow its revenue and show investors that it can follow a path similar to Paytm and scale its lending business while not compromising on the quality of borrowers. There has not been enough proof for this yet at the scale they are expected to grow to,” said a banker who worked with PhonePe in the past.

The BofA report also pointed out that the Super App promise has not worked well in India and payments apps are likely to be restricted in their role and hence the valuation upside is likely to be limited.

“Unlike the China and Southeast Asia (SE) internet landscape, which has multiple super-apps, we note that the Indian internet market has evolved with no dominant super-app. There is no Indian platform dominating the profit pools across sub-sectors,” the report said.

For instance, in investment, Groww and Zerodha dominate, while PB Fintech dominates online insurance aggregation. “Given the fragmented nature of the Indian fintech market, we believe that for any fintech, dominating a niche space is key to showing improvement in its profitability,” the report added.

Merchant base is growing slowly

The company’s merchant transaction value has grown by around 12 percent, while its monthly active merchants also remain static at around 1.1 crore.

The merchant devices subscription is also much lower than Paytm. Phonepe reported 92 lakh merchant devices, while Paytm had close to 1.37 crore merchants paying subscription

Fees.

The potential to increase lending penetration in consumer and merchants could provide a huge upswing to PhonePe, the reports noted.

“However, they need to prove they can achieve the scale of their rivals or even do better than them. Only then will investors be ready to give them the asking valuation,” the banker quoted above added.