PhonePe charting path to join elite club of start-ups; valuation soars

In 2016, when PhonePe was acquired by e-commerce firm Flipkart, nothing much was revealed about the valuation of the company, which was just about a year old then. 

But the best thing that the Flipkart management did then was to allow the payments firm to operate as an independent entity. This helped it to scale faster, riding on the digital payments wave that was already growing in the country. And even after global retail major Walmart acquired majority stake in parent Flipkart last year, it allowed PhonePe to maintain the same independence under the leadership of Samir Nigam, one of the three co-founders. And, the results are fairly visible now with a report by Morgan Stanley pegging its valuation at $7 billion. Also, there is a potential to grow manifold by broadening its offerings in the financial services space.

The global investment banking major said PhonePe could be valued at even $20 billion, if it continues with the current pace of growth and is able to monetise the new financial services lines. This marks a significant jump for PhonePe, which was valued at $1.5 billion when Walmart acquired Flipkart, PhonePe’s parent firm, in May 2018. Paytm is valued at $14-16 billion, according to certain reports.

The Morgan Stanley report affirms PhonePe's growing dominance in the space, which can be a major factor in attracting external investments.

PhonePe is said to be in talks with top investors such as DST Global, Tiger Global, Tencent and Ribbit Capital, among others, to raise upto $1 billion at a valuation of $7-8 billion. In its report, the investment bank said PhonePe could see potential revenue of $1.4 billion from its foray into financial services, akin to Paytm, where it will sell investment and credit products to users. 

Paytm, which made Rs 43 crore in revenue while losing Rs 800 crore in FY18, launched mutual funds in March this year. "If PhonePe can monetise financial services, we see it gaining a substantially higher market share than in our base case. We model bull case revenues of $70 million from payments, $690 million from distribution of financial services and $2.5 billion from consumer lending," by 2029, the report noted.

PhonePe has been aggressive at growing its user and merchant base. In May, PhonePe had 4 million merchants live on its platform, and about 40 million monthly active users. The payments app processes over 300 million transactions a month, translating into about $80 billion transaction float on an annualised basis. 

In a blog post released last month when the US retail giant completed one year of its acquisition of Flipkart, Judith McKenna, president and CEO of Walmart International, singled out PhonePe, highlighting several of its achievements.

"In less than three years, PhonePe has surpassed 2 billion transactions. And, as the team continues to look for opportunities to grow, it recently added PhonePe's services to Walmart India's B2B Cash & Carry stores. It's another step toward providing small business owners with new payment options that create convenience," said McKenna. "And, it's another thoughtful way we're connecting the dots across Flipkart and Walmart - strengthening both businesses in the process."

Like its peer, PhonePe has benefited from policy developments - demonetisation, launch of UPI and QR-codes. Transactions on UPI, the government-owned digital payments network which all major payments apps have now adopted, have grown tremendously. 

In August, 918.35 million transactions with a total value of Rs 1.54 trillion were recorded, a growth of 194.3 per cent in terms of number and 5.5 per cent in value on a year-on-year basis, according to National Payments Council of India (NPCI), which manages UPI.

According to the Reserve Bank of India, in FY19, UPI transactions (5.3 billion) were higher than debit and credit card transactions (4.4 billion) for the first time.

In March, the Walmart board gave approval to PhonePe to raise external funding.

Under Flipkart, PhonePe has kept the ball rolling with consistent cash infusions from the parent group, the latest one being Rs 743 crore in March this year. 

It has swiftly tied up with all internet services as a payments mode and on-boarded offline merchants (with its QR code-based solution) at breakneck pace.

However, competition has intensified after the entry of Google Pay and Amazon Pay, payments offering by two of the world's biggest tech firms, which are investing heavily to grow their market share.