PhonePe vs Paytm: Scale, Profits and the Valuation Puzzle

As PhonePe gears up for its much-anticipated stock market debut, its comparison with its listed peer Paytm becomes unavoidable. Recent brokerage reports even revealed a contrast between PhonePe and its rival, Paytm (One 97 Communications). 

The Vijay Shekhar Sharma-led fintech player launched its ₹18,300 crore IPO in November 2021 at a valuation of approximately $19-20 billion. The company issued shares at ₹2,150 apiece, but the stock faced immense pressure due to expensive valuation concerns, closing far below the issue price shortly after listing. 

On the other hand, PhonePe, which has filed its draft red herring prospectus (DRHP), is reportedly seeking a valuation of $13-15 billion for a roughly 10% stake sale by existing shareholders. At the upper end, that would imply a market capitalisation 60-90% higher than Paytm’s current valuation, which is around $8.5 billion. 

And the fintech is seeking such a higher valuation despite being EBITDA negative, while Paytm has turned EBIDTA positive. This raises questions whether PhonePe’s IPO will redraw the competitive map of India’s fintech sector, or it could trigger a re-rating for Paytm. 

The UPI Story 

On operational metrics, PhonePe is the dominant force in Unified Payments Interface (UPI) as it commands over 45% market share by volume as a third-party application provider (TPAP), ahead of Google Pay and Paytm. 

As of FY25, PhonePe reported 618 million life-to-date registered users, and nearly 45 million registered merchants, covering an estimated 77-80% of the country’s 56-58 million trade and services merchant base. The app’s reach is not limited to metros; as of 1HFY26, roughly 65% of its consumers came from tier-2 and smaller cities. 

Paytm, in contrast, has ceded ground in pure UPI market share but has leaned harder into monetisation layers, particularly financial services distribution. This divergence in strategy now lies at the heart of the PhonePe vs Paytm debate because scale is not a challenge for fintech players — monetisation is. 

The Distribution Battlefield

PhonePe has been scaling up its distribution of financial services business, including loans, mutual funds, insurance, etc., in the past few years. Macquarie, in its recent report, highlighted that the company’s overall share in revenues has gone up from 4% in FY24 to 13% in H1 FY26. 

For Paytm, distribution is far more material. In 1HFY26, it generated ₹11,720 million from distribution, nearly 29% of its overall revenue. In FY24, Paytm’s distribution revenue was 10 times PhonePe’s; by 1HFY26, it is about 2 times. This compression signals how aggressively PhonePe is catching up in the distribution game.

However, the brokerage flags this as a key risk for Paytm. “Further rapid scale up of this business could have implications for Paytm in our view in terms of increased competition and possibly lower margins as nearly 1/3rd of revenue for Paytm comes from the distribution business,” the report said. 

In other words, the payments war may be commoditised, but the real margin battle is in credit and cross-sell.

Revenue Segments Under Scrutiny

PhonePe’s scale masks near-term regulatory headwinds. The draft prospectus highlights that roughly 19% of PhonePe’s H1 FY26 revenue came from segments that are now restricted or discontinued. 

These include rent payments routed via credit cards (after the Reserve Bank of India tightened norms on payment aggregators), revenues linked to real money gaming (following a government ban in August 2025), and incentives under the RBI’s Payment Infrastructure Development Fund (PIDF), which ended post CY25.

Additionally, UPI incentives from the government contributed about 6% of FY25 revenues. In contrast, Paytm’s exposure to rent, real money gaming, and PIDF incentives is significantly lower, just 3% of total revenue in H1 FY26. 

“Dependence on UPI incentives from Government is additional ~6% of revenues (FY25) compared to 2% for Paytm. Share-based incentives at Phone Pe are high, causing EBITDA to be negative. Additional risks in the form of NPCI capping UPI market share to 30% by 31 Dec 2026 can affect onboarding of new customers,” the report said. 

“Phone Pe also makes revenues out of selling digital gold, which as a product, has been under scrutiny from the regulators,” it added.

This divergence in revenue quality could become a key investor talking point during the IPO roadshow.

ESOP Expenses vs EBITDA Margin

The brokerages stated that ESOP expenses continue to weigh heavily on profitability, particularly for PhonePe. In H1 FY26, ESOP payouts accounted for nearly 46% of PhonePe’s total revenues, up sharply from 33% in the financial year 2025. 

This makes it the highest among new-age companies and the primary reason its EBITDA margins remain negative. In contrast, Paytm’s ESOP costs stood at just 2% of revenues in H1 FY26, compared with 12% in FY25. 

The first-half figure for Paytm appears unusually low, and the annual run rate is estimated at around ₹2.5-3 billion—still significantly below the A major reason: share-based payments. In 1HFY26, PhonePe’s ESOP costs were ₹18,129 million — a staggering 46% of total revenues. For Paytm, ESOP costs were just 2% of revenues in the same period.

“Paytm is operating around breakeven, while PhonePe remains loss-making at the profit-before-tax (PBT) level. The difference is driven largely by PhonePe’s employee stock option plans (ESOP) expense (40 per cent of revenue in H126), even as the two firms’ fixed cost bases are otherwise comparable,” Bernstein added. 

Structural Risks for Fintech Players

There are, however, systemic risks that affect both players. The National Payments Corporation of India (NPCI) has proposed a 30% cap on UPI market share by December 2026. With PhonePe’s volume share currently around 46%, implementation could constrain incremental customer additions.

Additionally, the Securities and Exchange Board of India (SEBI) has cautioned investors about digital gold products offered by fintech apps, flagging the lack of regulatory oversight. Any tightening here could hit ancillary revenue streams across platforms.

Ultimately, PhonePe vs Paytm is less about who wins UPI and more about who monetises India’s digital financial stack more effectively.

If PhonePe lists at a hefty premium, it may validate the long-term value of fintech platforms built on India’s public digital rails. But it will also intensify scrutiny on revenue quality, regulatory dependence, and the path to profitability.