PhonePe’s DRHP decoded: Why its losses may actually signal strength

PhonePe’s recent DRHP has led to a lot of news and reporting on its diversification strategy.

A closer look at the same UDRHP reveals a company executing a classic platform playbook that needs to be contextualised as the company looks to go public.

Losses in new businesses: Are they a problem?

Let us start with the subsidiary losses. Indus Appstore lost Rs 130.37 crore. PhonePe Wealth Broking lost Rs 90.37 crore. Insurance Broking posted a deficit of Rs 50.34 crore. Lending Services reported a loss of Rs 42.54 crore.

These numbers are real. What is missing is the context that makes them meaningful.

Every single one of these verticals, be it wealth management, insurance distribution, lending, is in its early scaling phase. Lending was launched just three years ago. Insurance distribution is targeting a market where penetration rates remain among the lowest in the world. Wealth management is competing for customers who have historically had little access to investment products.

Building customer acquisition infrastructure, compliance frameworks, and product capabilities in any of these categories costs money before it makes money. That is not a warning sign. That is how new financial services businesses are built.

The more relevant data point is trajectory. Revenue from lending and insurance distribution grew to 11.55% of total revenue in FY25, up from 6.76% the year before, with absolute revenue more than doubling to Rs 452 crore.

Non-payment businesses as a whole grew 208% year-on-year. These are not the growth rates of a diversification strategy falling flat. They are the growth rates of a strategy gaining momentum precisely as it absorbs its heaviest investment costs.

The cost of building a business cannot be equated with the failure to build one. The two are not the same.

The merchant numbers deserve a more honest reading

The growth in Monthly Active Merchants (MAM) 11.43 million in FY23, 11.45 million in FY24, 11.31 million in FY25, and 11.11 million in the first half of FY26 need to be examined closely.

First, some perspective on what the number actually represent. PhonePe's merchant network spans 98% of India's postal codes. The question of whether the company has saturated the readily addressable merchant base in its current form is a legitimate one. But saturation at near-total geographic coverage is a very different problem from failing to grow. It suggests that the law of large numbers is doing what it always does.

Second, and more importantly, Monthly Active Merchants is a count metric, not an economic metric. The relevant question is not whether the number is growing, but whether the revenue generated per active merchant is growing.

As PhonePe rolls out EDC machines, smart speaker QR systems, billing and POS solutions, and eventually business lending products to its existing merchant base, monetisation per merchant is the variable that drives financial performance — not the raw headcount. The prospectus is transparent about this shift in focus, from expanding the merchant base to deepening its commercial relationship with the base it already has.

Marketing spend and the Investment-leverage debate

The UDRHP mentions a near-50% rise in advertising and sales promotion expenses in the six months ended September 2025, alongside a compression in adjusted EBITDA margin from 15.74% to 6.48% in the same period. Should this be seen as evidence that higher marketing spend is not delivering operating leverage?

What this framing ignores is that the first half of a financial year, in which a company is ramping marketing spend ahead of an IPO and simultaneously investing in new product categories, is not the right window through which to assess the long-term relationship between marketing costs and operating margins. Half-year margin snapshots during an active investment phase are inherently noisy.

The full-year FY25 picture is more instructive. The Adjusted EBITDA reached Rs 1,477 crore and adjusted profit after tax more than tripled to Rs 630 crore, on revenue growth of 40%. That is a business generating and growing operating profit while simultaneously absorbing the costs of building four or five new business lines. It is not a picture of marketing spend running ahead of results, but it is a picture of a company choosing when to press the accelerator.

Technology Costs: Infrastructure, not overhead

The UDRHP mentions Rs 4,000 million in semi-annual technology infrastructure. For a platform processing 9.8 billion transactions in a single month, infrastructure is the product. Reliable, low-latency payments processing at that scale requires sustained capital investment.

PhonePe's argument that building proprietary data centre infrastructure reduces long-run costs is not a speculative claim, it is the same rationale pursued by every large-scale technology platform that has moved away from third-party cloud dependency. The alternative, underinvesting in infrastructure at 9.8 billion monthly transactions would be the real risk to flag.

What a critical reading of PhonePe's prospectus misses is the coherence of the model. Payments deliver 300 million monthly active users and daily habitual engagement at zero marginal cost to the user. That engagement is the acquisition engine for every financial services product the company sells.

Insurance, lending, and wealth management products distributed to a pre-existing, highly engaged user base carry structurally lower customer acquisition costs than standalone competitors and that cost advantage compounds as the user base grows.

The company is not claiming it has finished building this model. It is claiming it has built the foundation and is in the process of monetising it. The evidence is in the numbers.

With a 208% growth in non-payment revenue, tripling PAT, and a lending and insurance segment that has moved from near-zero to over 11% of revenue in three years, suggests that claim has merit.

Public market investors will ultimately decide what PhonePe is worth. Reading a DRHP is not the same as understanding a business. In PhonePe's case, the gap between those two things is precisely where the investment thesis lives.