Walmart has truly unlocked value in PhonePe. But its success as a spin-off solely depends on how much money it manages to raise from investors, including Walmart, and for how long.
It’s a story of a unicorn within a unicorn. A recent piece by Bloomberg suggested PhonePe, the payments solution that Flipkart acquired a couple of years back, may now be valued at around $10 billion.
Walmart, which bought 77 percent in Flipkart last year for $16 billion, is considering spinning off PhonePe as part of a plan to raise around $1 billion. This fund raising could fetch a valuation of $10 billion for the digital wallet subsidiary.
This means, as Bloomberg pointed out, the cumulative valuation of Flipkart and PhonePe would be around $30 billion. That’s a jump of 44 percent in just about 18 months when Walmart bought 77 percent of Flipkart at a valuation of $20.8 billion in May 2018.
The question to ask here is whether PhonePe has always been a hidden jackpot, or is it Walmart that transformed it into one?
PhonePe was Flipkart’s third acquisition in the payments space. Flipkart bought PhonePe even before the company launched its Unified Payments Interface product. The acquisition was part of Flipkart’s plan to build a digital payments solution for its customers like rival Amazon had done with Amazon Pay globally - a product also launched in India soon after Flipkart’s PhonePe buy.
Initially, more than 50 percent of PhonePe’s transactions came from Flipkart, which now accounts for less than 0.5 percent. But, how did PhonePe reduce its dependence on Flipkart?
Besides the fact that PhonePe got a boost during-and-after the currency note ban by Indian government in November 2016 (like every other mobile wallet in the country), Walmart understood its potential and opened every door for the digital wallet to fly. In February 2019, a few months after it acquired Flipkart, Walmart started offering PhonePe as a payment option to consumers at its cash-and-carry retail stores in India. It clicked.
And, PhonePe suddenly got a huge untapped market in the offline space, full of mom-and-pop stores. Simply put, Walmart unlocked value in PhonePe much faster than Flipkart could have done ever. Payments is an integral part of any mode of retail business, but Walmart did not have a solution. PhonePe was one of the value-additions that Walmart needed in India.
That specifically is the reason why Judith McKenna, global president and chief executive officer of Walmart International had said in the company’s annual shareholders meet in June, “One of the things they’re (PhonePe) really doing for us is I know much more about the payments business than I did 10 months ago”.
That pretty much sums up why Walmart infused fresh cash of around $280 million in PhonePe in two tranches after it acquired Flipkart.
Like Walmart needed a PhonePe, probably PhonePe needed Walmart more. The valuation did not just crop up from nowhere. Walmart’s fund infusion twice did push the valuation of PhonePe, and then the growth it managed to achieve.
The competition is fierce as well. PhonePe is fighting against Alibaba and Softbank-backed Paytm, Google Pay, Amazon Pay, and Facebook’s soon-to-be launched WhatsApp Pay.
Paytm still has its first mover advantage, and is by far the largest mobile payment company with an estimated 33 percent market share and around 300 million users. However, research firm Kalagato’s data on app installations show that Paytm had 43 percent market share in July 2019 followed by PhonePe at 33.4 percent.
The market may take a different direction when WhatsApp Pay becomes a reality. It will have better reach than any other digital wallet, and it has the acceptance. With around 300 million users, WhatsApp is so popular that even political parties and their leaders find it a key tool to reach out to voters.
While PhonePe’s growth may not sustain in the same form like the past few months, the projected scope is huge in India. According to a study by Assocham-RNCOS, mobile wallet transactions are projected to cross Rs 275 trillion by 2022, from Rs 1.54 billion in 2016.
The good news is that Indians are slowly becoming comfortable in using UPI for digital transactions. According to data available with NPCI, there were 955.02 million transactions through UPI amounting to Rs 1.61 trillion in September, up from Rs 1.42 trillion in April. Total value of transactions stood at only Rs 59,835.36 crore in September 2018.
To sum up, it is Walmart that transformed PhonePe into a unicorn by infusing fresh funds, and by opening new markets for the payments entity that was probably impossible for Flipkart within such a short time. But it may be too early to rejoice PhonePe’s valuation. PhonePe, which is still burning cash by offering cash backs. To add to that, all its big rivals from Paytm to AmazonPay are backed by cash-rich parents or investors.Without a doubt, PhonePe’s success and sustainability solely depend on finding cash-rich investors, unless of course if Walmart wants to pump in money itself. Then the question would be for how long?Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.