PhonePe’s diversification pitch falls flat amid rising losses, surging costs and stalled merchant growth

Bengaluru-based payments major PhonePe is pitching diversification and financial services as its route to profitability, but its draft red herring prospectus shows widening losses, surging expenses and merchant growth that has largely plateaued over the past three years.

Across subsidiaries, losses are not only persistent but are widening. For the six months ended September 30, 2025, Pincode Shopping Solutions reported a loss of ₹2,056.51 million, up from ₹1,470.83 million a year earlier. The company also said as part of its draft prospectus that it has exited this vertical, after the payments company made substantial investments and launched the app with much fanfare. (Page 68, Point 26 of risk factors)

Indus Appstore’s loss widened to ₹1,303.70 million from ₹806.34 million. PhonePe Wealth Broking reported a loss of ₹903.65 million. Insurance Broking posted a loss of ₹503.36 million. Lending Services reported a loss of ₹425.43 million. The red ink cuts across commerce, app distribution, wealth, insurance and lending, the very verticals positioned as future profit drivers. (Page 68, Point 26 of risk factors)

The peer comparison table in the DRHP also demands careful reading. PhonePe’s total income for FY25 is shown at ₹76,313.82 million, but the topline masks the profitability gap and does not break down what is included or excluded within “total income,” leaving investors to interpret the comparison cautiously. (Page 142, Point F, Basis of Offer Price)

Operationally, a more concerning metric stands out: Monthly Active Merchants. Over three years, the number has barely seen any substantial growth. It reported monthly active merchants of 11.43 million in FY23, 11.45 million in FY24, 11.31 million in FY25. For the six months ended September 30, 2025, the figure declined to 11.11 million from 11.27 million a year earlier. In a payments business where merchant expansion underpins monetisation, flat growth over three years raises questions about incremental scale translating into deeper economics. (Page 47, Point 7 of risk factors)

Meanwhile, spending and expenses are bloating for the fintech. Advertisement and sales promotion expenses rose to ₹4,555.09 million for the six months ended September 30, 2025, compared with ₹3,076.31 million in the same period last year, an increase of nearly 50 percent year-on-year. Yet adjusted EBITDA margin fell sharply to 6.48 percent from 15.74 percent in the corresponding period. Higher marketing outlays are not yet delivering stronger operating leverage. (Page 78, Point 40 of Risk Factors)

PhonePe has also argued that investing in data centre infrastructure and related capital expenditure will help lower long-term costs. However, the expense disclosures show substantial ongoing technology spending. In the six months ended September 30, 2025, information technology infrastructure expenses were ₹2,838.34 million and license and service expenses were ₹1,274.08 million, together exceeding ₹4,000 million in half a year. These are material recurring costs in a business still reporting losses and compressing margins. (Page 60, Point 14 of Risk Factors)

The prospectus also flags macroeconomic and geopolitical risks from uneven growth in India to political instability, regional conflicts and global tensions as potential headwinds that could affect operations and investor sentiment. While such disclosures are standard in public filings, they underscore that the profitability journey will unfold in a complex and volatile environment. (Page 89, Point 63 of Risk Factors)

PhonePe’s strategic message is straightforward, payments generate cash, diversification drives margins, and disciplined capital allocation balances growth with profitability. The disclosures, however, show widening losses in new verticals, flat merchant growth, rising marketing expenses and heavy technology spending.