How PhonePe went from cameo to starring role in Flipkart’s show

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Amidst the eye-catching discounts on offer during Flipkart’s recently concluded Big Billion Days sale, a curious development went largely unnoticed. PhonePe, the payments company acquired in 2016 by Flipkart, no longer occupied pride of place on the checkout page. Instead, it was just another in a long line of payment options. PhonePe also wasn’t offering the massive cashbacks that it did on previous Big Billion Day sales.

Impact on Walmart

This was a marked change for both companies. Earlier, Walmart-owned Flipkart was PhonePe’s benefactor—both in terms of capital and as a source for users. PhonePe understood this well, taking on Flipkart’s challenges as if they were its own.

The demands of the Big Billion Days sale, for example, extended to PhonePe. “Usually, during the time of the [Big Billion Days] sale, people in PhonePe aren’t allowed to take leaves and work nights just like those in Flipkart. But this time around, Big Billion Days was insignificant for PhonePe,” said an executive associated with the Flipkart Group.

But while few outside the company noticed this new normal, it was the latest and clearest sign yet that three-year-old PhonePe had outgrown its parent, Flipkart. “Three years ago, Flipkart accounted for more than 50% of transactions on PhonePe, but now it is less than 0.5% of the 350 million transactions we do in a month,” said Karthik Raghupathy, PhonePe’s head of strategy and planning.

According to sources, Walmart and Chinese conglomerate Tencent, both investors at Flipkart, are expected to invest $1 billion into PhonePe. This will be at a $9-10 billion post-money valuation, said two sources aware of the matter. This would bring it close to Flipkart, valuation-wise. In 2017, a year before Walmart bought Flipkart Group for $16 billion in the world’s largest e-commerce deal, Flipkart’s valuation was $11.6 billion. It took the Bengaluru-born e-commerce company a decade to get there. PhonePe, which was founded only in 2015, is inching closer to decacorn status—startups valued at $10 billion and over.

And as PhonePe grows into a payments behemoth—with claims of 65 million monthly active users and an annualised $100 billion worth of transactions—reports say it will be hived off into a separate unit. This could mean Walmart and Tencent, along with PhonePe co-founders Sameer Nigam and Rahul Chari, will get to own a piece of PhonePe. So far, those in PhonePe either own Flipkart stock or stock options. A PhonePe spokesperson maintained that news of funding and PhonePe being hived off as a separate entity was speculation.

The rise in potential

PhonePe’s burgeoning potential has been a blessing for Walmart. The company drew the ire of investors with its Flipkart acquisition. But having received not one but two multi-billion-dollar companies through the deal, the upside looks better than it once did. For a large, value-conscious public limited company with a steely-focus on profits, though, this means little without profitability. And both PhonePe and Flipkart are loss-making entities.

With that in mind, PhonePe will have to get its revenue ducks in a row as it steps out from Flipkart’s shadow. It has already begun the process, looking to transition from a payments app to a financial services company. There are plans to launch a savings bank account product with Ratnakar Bank Ltd (RBL), said two sources aware of the matter. PhonePe termed this as speculation, while RBL refused to comment.

PhonePe has extended its ambition to new use cases—from travel bookings to bill payments to financial services like mutual funds and lending. In doing so, however, it will invariably cross paths with Flipkart’s own ambitions to go beyond e-commerce. When that happens, PhonePe and Flipkart will have to compete for capital from Walmart as both go about building out what could be competing businesses.

Both loss-making businesses still have a long road ahead of them and need billions in capital. And Walmart cannot possibly whet the capital appetite of both. Moreover, news reports also say that Flipkart CEO Kalyan Krishnamurthy could now become a Flipkart board member, making capital allocation trickier. PhonePe’s Nigam denies any capital-related pressures, pointing to Walmart’s $27.8 billion in free cash flows in fiscal 2019. This, though, is hardly its only challenge as it seeks to realise its potential.

Consequently, PhonePe has always been projected as an independent of Flipkart, with its own resources. Even so, it was Walmart’s entry that paved the way for PhonePe’s autonomy.