PhonePe IPO: Walmart-backed firm’s UPI dominance, new riskier businesses and other risk factors from DRHP

PhonePe

• PhonePe files IPO draft with SEBI, aims to address ownership concerns
• Over 90 percent of PhonePe's volume comes from UPI, which has zero MDR
• NPCI's proposed 30 percent market cap could force PhonePe to limit growth

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UPI payments app PhonePe has filed the draft red herring prospectus with markets regulator SEBI on January 22 to launch an IPO.

The Walmart-owned payments giant has a 45 percent market share in UPI, the country's most popular digital payments method.

Since UPI has an important role and outsized impact in the overall payments ecosystem, several government representatives have expressed concern about the company being owned by a US entity. However, the IPO and being a listed Indian entity with Indian retail investors should assuage some of these fears.

Here are the top five risk factors according to DRHP.

1. UPI Concentration and Zero MDR Over 90% of PhonePe’s volume comes from UPI, which has Zero Merchant Discount Rate (MDR). If the government doesn't introduce a fee structure, PhonePe remains reliant on "cross-selling" other products to make money.

2. Regulatory Market Cap (30% Rule) NPCI’s proposed 30% market share cap on Third Party App Providers (TPAPs) is a massive "key-man" risk. If enforced, PhonePe (at ~45%) would have to actively stop onboarding new users or reduce its volume.

3. High Dependence on Walmart as a majority-owned subsidiary of Walmart, any change in Walmart’s global strategy, regulatory issues in the US, or a change in control could adversely impact PhonePe’s operations and branding.

4. Expansion into High-Risk Lending to drive profitability as PhonePe is scaling its lending and credit business. This exposes the company to credit risks, potential defaults, and the stringent, ever-changing RBI norms on digital lending.

5. Intense Competition Beyond Google Pay, deep-pocketed players like Reliance (Jio Financial Services) and Tata (Neu) are aggressively entering the fintech space. Maintaining a 45% market share requires massive marketing spend, which could hurt future margins.

While PhonePe has listed several other operational and regulatory challenges, these are unlikely to have as much impact as the top five factors mentioned here.