PhonePe IPO: Macquarie flags ESOP costs, revenue concentration concerns

Broking firm Macquarie in an equity research report has drawn key concerns related to ESOP costs and revenue concentration for the proposed PhonePe initial public offering (IPO.) In its report, Macquarie has flagged that PhonePe’s high Employee Stock Ownership Plan (ESOP) expenses are a ‘significant drag’ on its EBITDA margins. 

“ESOP costs accounted for 46% of PhonePe’s revenue during the first half of FY26, the highest among its fintech peers,” Macquarie said adding that PhonePe’s listing would serve as a valuation benchmark in it’s space. 

“Despite the margin pressure from ESOPs, PhonePe maintains a dominant 45% share of India’s UPI digital payments market. This dominance opens door to additional risks in the form of NPCI capping UPI market share to 30% by 31 December 2026 – which can affect onboarding of new customers and hence the revenues too,” the broking firm said.

As per the PhonePe DRHP ESOPs represent non-cash expenses aligned with long-term employee ownership and value creation. Elevated ESOP costs reflect one-time grants and vesting patterns, not steady-state operating costs. Excluding ESOPs, PhonePe has demonstrated improving operating leverage, cost and discipline at scale. 

As the company matures and transitions to a listed environment, ESOP intensity is expected to normalise, consistent with lifecycle trends across technology platforms, as per the DRHP.

According to the updated offer document filed with SEBI, PhonePe’s revenue concertation risk is heightened by reliance on revenue sources (up to 20%) which have been or carry the risk of being restricted or discontinued. 

Macquarie said, “Of 1HFY26, closer to 19% of revenues (24% as of FY25) were sourced from rent (rent payments through credit card which has been discontinued by RBI), RMG (real money gaming) and PIDF (RBI’s payment infrastructure development fund) incentives which have been discontinued/restricted.”

Also PhonePe’s dependence on UPI incentives from Government is additional 6% of revenues (FY25) is much higher (to the extent of 3X) than its peer PayTM, it added.

As per PhonePe DRHP these changes are anticipated, disclosed, and factored into business planning.

PhonePe’s long-term monetisation focus is on merchant payments and value-added services, distribution of regulated financial products (insurance, mutual funds, lending) and platform-led monetisation across a large user and merchant base. 

Government incentives (UPI incentives, PIDF grants) are variable, non-recurring, and not foundational to the company’s long-term profitability model. As per the DRHP revenue

mix is structurally shifting toward diversified, regulation-compliant, scalable sources.

The UPI platform which is a Walmart entity recently received SEBI approval for its IPO and is expected to tap the capital market in the coming weeks. 

The company plans to raise about to $1.5 billion at a valuation of about $15 billion according to the report.

PhonePe’s IPO will comprise entirely of an offer-for-sale (OFS) transaction. As per the updated DRHP, Tiger Global and Microsoft are offering up their full stakes in the company, while Walmart is choosing to retain its majority stake and selling up to 45.9 million shares (about 9% of the company). 

Up to 50.66 million shares are up for sale. 

Macquarie also mentions that PhonePe exhibits several significant strengths and growth indicators.

The brokerage has also highlighted PhonePe’s operational efficiency and engagement; stable merchant activity and core profitability potential as well as business diversification and growth. 

As per the report PhonePe’s total revenue grew from ₹50.6 billion in FY24 to ₹71.1 billion in FY25. The company reported significantly higher net payment revenue compared to its main rival, Paytm, in 1HFY26.