PhonePe Raises $700 Million and Spins Off as Independent Entity

PhonePe, a key asset resulting from Walmart’s acquisition of Flipkart, is undergoing a “partial” separation, the Bangalore-based financial services company announced on Thursday. Accompanying this new phase, the company has successfully raised $700 million in a recent funding round.

The details of this funding round were not revealed, but PhonePe confirmed that Walmart spearheaded the investment, with contributions from current investors. This new investment establishes a post-money valuation for PhonePe, established by three former Flipkart employees, at $5.5 billion.

The announcement reflects substantial investor confidence in PhonePe’s prospects. The company had been actively seeking new funding for several quarters, and previously faced challenges securing investment at a $3 billion valuation earlier this year, as reported by TechCrunch. Last year, it aimed to secure approximately $1 billion with a potential valuation reaching $10 billion, according to sources familiar with the discussions.

This partial spin-off, developed over more than a year, will see Flipkart’s ownership in PhonePe decrease from 100% to 87%. Sameer Nigam, founder and CEO of PhonePe, stated that this move will provide the company with access to dedicated, long-term capital to advance its goal of financial inclusion for a billion people in India.

Despite the change, Flipkart will continue to be PhonePe’s primary shareholder, and the “two companies will maintain a strong working relationship,” according to PhonePe.

PhonePe, translating to “on the phone” in Hindi, currently holds a leading position in the Indian mobile payments sector, based on certain measurements. It overtook Google Pay to become the top UPI payments application in October. UPI, a four-year-old payment system created by India’s leading banks, is the most prevalent method for digital transactions in India. PhonePe processed 835 million UPI transactions in October, exceeding Google Pay’s approximately 820 million transactions during the same period.

“As Flipkart Commerce continues its strong growth, serving Indian consumers, we are optimistic about the group’s future,” said Kalyan Krishnamurthy, CEO of Flipkart Group, in a statement. “This change will enable PhonePe to fully realize its potential as it enters its next stage of development, while also maximizing value for Flipkart and its shareholders.”

A recent report by Bernstein analysts to their clients highlighted PhonePe as a potential candidate for an IPO within the next three years. The report noted PhonePe’s decreasing dependence on its parent company, Flipkart, falling from 50% of monthly transactions to less than 1% currently. PhonePe was the first to launch on UPI and has expanded into various services, including travel booking, bill payments, and financial services. The company has also introduced Switch, which allows users to seamlessly transition between PhonePe and other applications like food and grocery delivery services (a “Super App”), as they described it.

PhonePe, having surpassed 100 million monthly active users, may consider expanding its operations beyond India, according to the analysts’ report, which was reviewed by TechCrunch.

PhonePe and Google Pay currently compete with Paytm, which is supported by SoftBank and Alibaba. Paytm, previously valued at $16 billion last year after raising $1 billion, has been focusing on serving merchants in recent quarters, as the UPI platform currently does not offer a revenue model for companies.

Sajith Sivanandan, managing director and business head of Google Pay and Next Billion User Initiatives, stated at an event in Bangalore late last year that existing regulations in India have compelled Google Pay to operate without a defined business model within the country.

Adding to the competitive landscape, WhatsApp, the most popular smartphone application in India with over 400 million users in the world’s second-largest market, initiated the rollout of its payments service in the country last month. The Indian mobile payments market, estimated to reach $1 trillion by 2023, is at stake, as per Credit Suisse.