Mobile payments firm PhonePe’s revenue growth and profitability indicate that the company could list within the next couple of financial years. While its diversification strategy is likely to help the company grow at 75 percent for two consecutive fiscals, its discipline in running the payments business may yield sustained profits.
PhonePe co-founder and chief executive Sameer Nigam maintained that since the market does not appreciate companies without profitability, it will go for an IPO only if the company can achieve profitability consistently over some time.
This could likely mean that the company would want to do it consistently over two or three years before listing.
On August 26, the Bengaluru-based company reported a post-tax profit of Rs 197 crore at a consolidated group level in FY 24 without adding the employee stock ownership plan (ESOP) expenses. In comparison, the company had reported a loss of Rs 738 crore in FY23, though it stayed EBITDA positive at Rs 159 crore in its payments business.
The company has diversified with several new businesses being started or expanded over the last fiscal. Managing profitability at the group level in FY 24 means that the company has probably made good margins in the payments business during the last financial year.
“The company’s diversification within payments is at play here. They got into offline merchant payments in a big way and launched a payments gateway business for online merchants and these are contributing to their profitability. While they started lending only this year, it must be doing well too,” said an early-stage venture capital investor.
The UPI apps generate around 0.03-0.04 percent commission for facilitating payment transactions and given the scale of PhonePe at 7 billion transactions worth over Rs 10 lakh crore every month, that could be enough to drive profitability in the long run.
The results were announced by the company and were not updated on the Registrar of Companies website till the time of filing this story. Hence, the details on PhonePe’s expenses or profitability were not available.
Diversification and monetisation accelerate
PhonePe has been investing heavily in ONDC-based e-commerce app Pincode and equity trading and investment app Share.Market over the last year. Share.Market has seen its active investor-base rising to 1.7 lakh in July.
The payments firm has also been expanding its indigenous app store business, Indus, which crossed one million user downloads within a month in March.
Among PhonePe’s first business outside of payments was insurance and has been selling more than 3 million policies in a quarter. The company has invested more than Rs 1,000 crore in the business, according to media reports citing Registrar of Companies data.
Speaking at the Moneycontrol Startup Conclave in Bengaluru on August 9, Nigam said that each business has its own gestation period and needs branding, marketing, and cashbacks at the beginning of growth, except for the lending business, which generates cash from the start.
PhonePe added that merchant business and payment gateway are also generating profitability. The company has deployed around seven million merchant devices.
“There are a lot of value-add services, including point of sale (PoS) machines, sound boxes, advertisements merchant loans, where we are able to charge and monetise,” Nigam said.
PhonePe’s rival Paytm has built a close relationship with merchants and has around 10 million active merchant devices. The company generates around Rs 100 from merchants net of all expenses and taxes. That translates into Rs 1,200 crore annually.
PhonePe also charges similar subscription fees from its merchants and this could mean that it generates Rs 700 crore from this business annually.
Market leadership and revenue potential
US retail giant Walmart-owned PhonePe grew its revenue 74 percent to Rs 5,064 crore for FY 24, clocking a growth rate near 77 percent it had reported in the previous financial year. Thanks to the company’s high market share in the most popular UPI payments, it has been able to manage its high growth despite the large base effect.
PhonePe has close to 48 percent market share in UPI transaction volume and around 50 percent in UPI transaction value. Its closest competitor Google Pay has 37 percent, while Noida-based Paytm owns only 7.8 percent market share on the UPI platform.
Paytm, which started monetisation much earlier, reported around Rs 10,000 crore during FY 24. PhonePe could likely see its merchant subscription devices surpass Paytm in a few years, given the delta the companies have in terms of UPI market share.
The Bengaluru company has started the lending business only this year while Paytm had the business for around three years.
The lack of monetisation opportunities in UPI and the lack of merchant discount rate (MDR) has hurt some of the payment companies’ quest for profitability. But the government subsidies have helped many of them.
“The NPCI has managed to convince the government to increase the UPI subsidy substantially last year to around Rs 4,000 crore, which has lifted a lot of the payment companies close to profitability,” Nigam had said at the Moneycontrol event.
However, with more than 550 million users and the potential launch of credit line on UPI, PhonePe could see its next phase of growth.
"Our focus on disciplined financial management will help us continue in the progression towards profitability of our payments business. We also view that the optimisation of investments and capital allocation, in conjunction with building a diversified revenue model, will provide a solid foundation for sustainability future success,” Nigam said in the press statement announcing the company’s results.
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