Emkay Flags High Capex and ESOP Overhang at PhonePe; Data Centre Investments Yet to Demonstrate Operating Leverage

Brokerage firm Emkay Global has raised concerns over PhonePe’s cost structure in its February 25, 2026 Internet Sector Report, highlighting elevated capital expenditure, heavy ESOP costs and limited evidence so far of operating leverage from data centre investments.

Under the section discussing cost benchmarking, Emkay notes that while PhonePe’s H1FY26 EBITDA before ESOP at ₹2.5 billion is only marginally lower than Paytm’s ₹2.8 billion, the divergence widens materially at the EBIT level due to significantly higher ESOP and depreciation costs.

According to the report, PhonePe’s high ESOP costs stood at ₹18.1 billion compared with ₹650 million for Paytm, while depreciation and amortisation expenses were ₹5.7 billion versus ₹3.0 billion for Paytm. As a result, EBIT for PhonePe stood at a loss of ₹21.2 billion against a loss of ₹900 million for Paytm in the comparable period.

Emkay attributes the higher depreciation burden to elevated capital expenditure over FY23 to FY25. The report states that PhonePe’s capex during this period was ₹35.8 billion compared with Paytm’s ₹18.5 billion, largely driven by investment in data centres.

Crucially, the brokerage adds that while higher investment in data centres has been undertaken, it “has not yet significantly lowered IT infrastructure costs or demonstrated operating leverage,” and therefore expects depreciation and amortisation expenses to remain high due to legacy capital expenditure.

The cost overhang is further compounded by the company’s compensation structure. Emkay notes that PhonePe’s structure is ESOP heavy, with 7 to 45 percent of ESOP costs settled with cash compensation from its balance sheet, increasing direct cash outgo alongside accounting expense.

The report also highlights that while PhonePe has demonstrated consistent improvement in adjusted EBITDA during FY23 to FY25, revenue growth decelerated to 22 percent in H1FY26 and incremental margins remain modest. Despite strong consumer engagement metrics, including over 300 million monthly active users and a UPI market share exceeding 45 percent, Emkay notes that monetisation remains limited, with revenue per MAU among the lowest in the consumer internet peer set.

Excluding revenue streams such as real money gaming, rent payments and PIDF incentives, which are either set to be discontinued or have already moderated, Emkay estimates that PhonePe’s H1FY26 revenue would be materially lower relative to peers.

PhonePe’s Draft Red Herring Prospectus (DRHP) indicates that the proposed IPO is structured entirely as an offer for sale, with no fresh capital being raised by the company. Promoters WM Digital Commerce Holdings Pte. Ltd. and Walmart International Holdings, Inc. are among the selling shareholders, along with investor shareholders including Tiger Global PIP 9-1 Ltd. and Microsoft Global Finance Unlimited Company.

With media reports indicating a valuation range of $13 billion to $15 billion, Emkay’s analysis suggests that on a revenue multiple basis the stock would trade at a premium to Paytm, even as profitability metrics remain weaker and cost pressures persist.

Taken together, the brokerage’s assessment underscores a key theme: while PhonePe commands strong consumer engagement and market share, elevated capex on data centres and an ESOP heavy compensation structure continue to weigh on reported profitability, and operating leverage from infrastructure investments is yet to be clearly demonstrated.