Wake up and smell the coffee: Public markets are done buying storyfication

Assume that the market sentiment today was firmly risk on: low volatility, muted geopolitical risks, and abundant liquidity. Even then, I would wager that institutional public investors would not be underwriting a $15 billion valuation for PhonePe.

Blaming market conditions is convenient. But what this moment really represents is a deeper shift, one that has less to do with geopolitics and more to do with how public markets are evolving. To be clear, this is not a PhonePe story. It is a market story.

Over the last few years, India’s public markets have gone through their own learning curve with new-age digital businesses. The first wave of IPOs was built on narrative strength: large addressable markets, rapid user growth, category creation, and the promise of future monetisation. Investors underwrote these stories, often at steep premiums, on the belief that scale would eventually translate into profitability.

Markets now have enough data to revisit that assumption. Many of these companies saw sharp drawdowns well before any global risk-off phase set in with many trading at close to their all time lows. Those corrections were not macro-driven, but valuation-driven, a reassessment of what these businesses were actually worth based on their ability, or inability, to generate sustainable earnings.

In other words, public markets have begun to call the bluff on narrative-driven valuations. This shift marks an inflection point as the bar for what constitutes a high-quality public market business is being reset. Growth is no longer enough. Even market leadership, in the absence of monetisation, is no longer enough. What matters now is far more fundamental: the ability to convert distribution into durable, high-margin revenue streams.

This is where the PhonePe debate becomes instructive. At one level, PhonePe is an exceptional business. It has built one of the largest distribution platforms in India through UPI, characterised by high-frequency usage, strong consumer trust, and low customer acquisition costs.

That distribution is valuable as it creates daily engagement, positioning the company at the centre of India’s digital financial ecosystem. But distribution is not monetisation. UPI scale is not the business model, it is the starting point. The real question is how effectively that distribution converts into high-margin revenue streams, whether through lending, insurance, wealth management, or merchant monetisation.

For any investor evaluating this business, the valuation framework has to be grounded in three things: what the steady-state revenue mix looks like, what margins are realistically achievable, and what multiple one is willing to assign, even on a generous basis, relative to global and domestic peers. Work backwards from that to a fair market capitalisation, not the other way around.

There is also a competitive reality that cannot be ignored. While PhonePe’s distribution leadership in UPI is significant, switching costs in payments remain low and competition continues to be credible. The real moat will not be payments share alone, but the ability to layer financial services on top of that distribution and retain users across products.

Then there is a second layer to this discussion that deserves more attention. If an IPO is largely an offer-for-sale, public market investors are effectively providing liquidity to existing shareholders rather than funding the company’s next phase of growth. That is not inherently problematic, but it changes the investment equation.

In such a scenario, the upside for new investors depends almost entirely on execution. The question becomes straightforward: what needs to happen over the next five to ten years for this business to deliver meaningful shareholder returns from its listing price? That answer must be grounded in earnings, not narratives.

None of this is to suggest that companies like PhonePe will not succeed. Many will, and for the sake of the ecosystem, one should hope they exceed expectations. But success as a business and success as a stock are not always the same thing. A product can be deeply embedded in your daily life, intuitive, reliable, and indispensable, without necessarily being an attractive investment at a given price. Public markets do not reward usage, they reward the translation of that usage into cash flows.

This is the message that the next generation of companies preparing to list would do well to internalise. For the Zeptos of the world, and for the broader cohort of digital-first businesses, the implication is clear. The playbook that worked in the first wave of IPOs, emphasising scale and storytelling, will not be sufficient going forward. Investors are now looking for clearer paths to monetisation, stronger unit economics, capital efficiency, and credible timelines to profitability.

This is not a negative development. It is a sign of a maturing market. Value being “left on the table” in IPOs is often framed as a missed opportunity, but it is discipline returning to the system. It ensures that public market capital is allocated more efficiently, that companies are priced more realistically, and that long-term investors are not subsidising overly optimistic assumptions.

The easiest pushback and lazy argument one often heard was: “you don’t understand how to value digital businesses.” But as the old adage on Dalal Street goes: bhaav bhagwan che (price is king).

The market is not rejecting innovation, it is rejecting blind extrapolation. In the end, admiration may build great companies. But allocation is driven by something far simpler: returns.