PhonePe's journey to become one of the most valuable startups

A recent Morgan Stanley report says, the Walmart group firm has potential to become a $20 bn company at current growth rate

PhonePe, the payments business of the Walmart-Flipkart group, has received yet another validation, this time from financial services major Morgan Stanley. The global investment bank said in a recent report that PhonePe could be valued as high as $20 billion, if it continues with the current pace of growth and is able to monetise the new financial services lines.

Given the marketshare of the company and state of the payments market, PhonePe is valued at $7 billion currently, according to Morgan Stanley. Paytm, its chief rival, is valued at $14-16 billion, according to reports.

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.

The Morgan Stanley report affirms PhonePe’s growing dominance in the space and is expected benefit an on-going deal to raise funding. PhonePe is in talks with top investors DST Global, Tiger Global, Tencent and Ribbit Capital, among others, to raise $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. The company, which made Rs 43 crore in revenue while losing Rs 800 crore in FY18, launched mutual funds in March this year.

“If PhonePe can monetize 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, which launched in 2015 and acquired by Flipkart a year later, 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 actives users. The payments app processes over 300 million transactions a month, translating to about $80 billion transaction float on an annualized basis.

Like its peer, PhonePe has benefited policy developments – demonetization, launch of UPI and QR-codes. Transactions over 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.

All these have metamorphosed PhonePe a handsome asset for Walmart, which is looking to unlock its value. In March this year, 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 break-neck 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.

It remains to be seen which investors back PhonePe. Alibaba and its fintech subsidiary are backing Paytm, while Naspers has a large footprint through PayU, which has made a slew of acquisitions, including Citrus Pay in 2016. Amazon is an investor in Capital Float. Tencent, which operates the hugely popular WeChat in China, does not have a direct investment in a payments company so far.

For now, PhonePe is sitting pretty, but its success will depend on how it maintains growth and battles competition.