When Walmart (NYSE:WMT) bought a 77% stake in Flipkart last summer, it was angling to get a big piece of India's burgeoning e-commerce market. And while the outlook for e-commerce has cooled under new Indian government restrictions, Walmart happened to snatch up another fast-growing property along with Flipkart.
Flipkart's mobile payment app, PhonePe, has seen considerable growth over the past year, now rivaling market-leader Paytm. A recent survey found 41% of smartphone users in India had installed PhonePe, up from 24% last year. Overall payment volume is growing even faster; transactions and payment volume are both up about fourfold year over year. Flipkart and Walmart are highlighting that surge in growth as they look to raise $1 billion to spin off the payments company at a valuation of $10 billion, according to a report from Bloomberg.
A massive network
Powering PhonePe's transaction-volume growth is its network of consumers and merchants. The company says it has 150 million active consumers and 5 million merchants that accept payment via PhonePe. It now facilitates about 8 million transactions per day.
Those numbers are similar to where PayPal (NASDAQ:PYPL) was five years ago. It had 152 million active customer accounts making about 10 million total transactions per day in the second quarter of 2014. PayPal has managed to nearly double over the last five years.
PhonePe is growing even faster than PayPal was back in 2014, but its valuation is about one-fifth of the value the U.S.-based payments app received when it became an independent company in 2015. With the considerable growth yet to come in India's e-commerce market as well as growth in smartphones, PhonePe's user growth ought to continue to outpace PayPal's.
That said, the company's average transaction value is likely considerably less than PayPal's. That's due to the lower cost of living in India compared with the Western markets where PayPal is more popular. Still, $10 billion may be undervaluing PhonePe and its potential growth. Edward Yruma, an analyst from KeyBanc Capital Markets, says PhonePe could be worth $14 billion to $15 billion as a stand-alone company.
Spinning off to create more value
Spinning off PhonePe can create more value for shareholders by opening the door for outside investors and releasing it from its ties to Flipkart.
Walmart reportedly invested $300 million into PhonePe since acquiring its stake in Flipkart last year, but it sees greater opportunity to attract outside investors after the payment app's recent growth. It can use the capital to expand to greenfield markets in India's heartland where Paytm still has very little presence.
Spinning off PhonePe could help boost the number of merchants on the network and overall transactions. Merchants may be hesitant to use PhonePe as long as it's tied to Flipkart, and Flipkart may not want to support commerce with other merchants using PhonePe.
PayPal has been able to grow well beyond eBay in the four years since its spinoff. Management has highlighted several big opportunities it sees once its operating agreement with its former parent company ends next year.
Digital payments in India will quintuple between now and 2023, according to analysts at Credit Suisse. In order for PhonePe to capture a significant portion of that growth, its best bet is to become an independent company.
Walmart will still own a majority share of PhonePe if it successfully spins off the company. A $10 billion valuation represents a massive return on its investment, and there's still a lot of growth ahead of it.