PB Fintech’s digital market places — Policybazaar.com for insurance and Paisabazaar.com for consumer lending — are firmly placed at the intersection of financial solutions and digital adoption. The leading presence can ensure a high growth for a sustained period. But despite high growth prospects, the IPO price commands a premium valuation of 46 times FY21 sales, casting a long shadow on return potential. The issue, aims to raise ₹5,700 crore, consisting of a fresh issue of ₹3,750 crore and the rest an offer for sale.

The business

Revenue for the company is driven by commission and fees, from insurance (68 per cent of FY21 revenues), and lending (21 per cent). PB Fintech’s insurance business generates commissions on sales (43 per cent) and outsourcing services (49 per cent) provided to insurers and rewards. On a base of total premium, the commission rate and even the outsourcing charges are 5 to 6 per cent each, while rewards is another 1 per cent, across FY19-21. Paisabazaar similarly generates commission revenues from loan disbursals and other services in the range of 3-6 per cent.

The familiar story of under-penetrated markets meeting digital highway leading to high growth can play out with PB Fintech as well, which already has 65 per cent share in digital insurance. The insurance industry is expected to grow at 18 per cent CAGR till FY30 as per Frost & Sullivan, as the demographic prioritises insurance for security (and not for investment). The Covid pandemic laid bare the coverage gap at 83 per cent (gap to adequate insurance cover for an earning member) and health insurance gap (63 per cent of healthcare met from out-of-pocket). In such a high-growth industry, digital distribution as a channel improving its market share from current 1 per cent would imply a super normal growth . China and US digital penetration stands at 5.5 per cent and 13.3 per cent respectively in 2020.

Government of India initiatives in promoting financial inclusion with banking penetration and open infrastructure for payments can sustain a faster learning curve in India. Consumer lending on the other hand has an established market with comparatively higher digital adoption (digital consumer lending accounted for 22 per cent in FY21 in India). Even with intensely competitive digital marketplace for lending, Paisabazaar has 53.7% market share, based on digital disbursals in FY21.

Inherent momentum

As of September 30, 2021, Policybazaar has on offer over 390 insurance products from 48 insurance partners which represents 85 per cent of licensed insurers in India. The insurance portal has 51 million registered users with 20 million policies sold since inception. The availability of most insurers at one place attracts consumers and the consumer behaviour insights generated across consumer profiles is a valuable insight to insurers, generating valuable network effect. Although this may not be exclusive to PB Fintech, being the largest may sustain the cycle.

Complementary to digital network can be the stickiness of insurance buying. Policies need to be renewed periodically and according to the company, consumers who purchased health insurance through Policybazaar in 2014 for the first time have made purchases worth 5.9 times the 2014 premium till 2021. Similarly, the multiplier is 3.4 times for motor insurance. In Paisabazaar, the company uses convenient access to credit scores to build a large pool of consumers and develop valuable consumer insights which can be accessed by its 56 lending partners. Of the total premium of ₹4,701 crore generated by Policybazaar in FY21, ₹1,958 crore (42 per cent) is from renewal premium compared to 26 per cent renewal premium in FY19. Similarly, of the total disbursal of ₹2,916 crore from paisabazaar, 67 per cent was to existing users which improved from 42 per cent in FY19.

Growing scope

PB Fintech, which was acting as a web aggregator earlier, received its insurance broker license in June 2021 which should enable the company to widen its scope of contracts with its partners which is under renegotiation . The licence incrementally allows for addressing group policies and providing in-person assistance The company plans to develop a network of POSP (point of sale) across 200 locations in India, in the next three fiscals and has set up 21 physical outlets as of September, 2021. The company can address complex products like endowment policies and also tap SME and group insurance markets with a field force of physical personnel. The company also hopes to add LIC to its list of partners which can be complementary to markets across Tier-II cities’ .

It is on the lookout for geographical and vertical expansion as well. PB Fintech has started operations in Dubai and plans to scale up in the broader Gulf region. PB Fintech acquired a controlling stake in Visit Health — a company offering health-tech platform to corporates through its subsidiary Docprime which offers health ‘lockers’. The company intends to acquire companies which are complementary to its health/insurance/lending platforms and has earmarked ₹600 crore from the fresh issuance for such acquisitions/investments. Brand building, offline channel and international presence have been allocated ₹1,500 crore and ₹375 crore each from fresh issuance.

Financials and valuation

Revenues in FY21 were impacted by the pandemic on account of lower travel insurance and consumer lending with disbursal declining by 55 per cent. . Revenues grew by 12 per cent in FY21 compared to 62 per cent in FY20, and has recovered to 36 per cent in Q1FY22 . Assuming a growth of 40 per cent CAGR for next four years in total premium (18 per cent industry growth with digital participation improving to 2 per cent form 1 per cent) and an industry level growth of 10 per cent in lending portfolio, PB Fintech can report revenues of ₹2,350 crore in FY25 from the current ₹957 crore. This would imply a Price to sales ratio of 19 times compared to IPO value of 46 times even at FY25 revenue level.

While revenue growth is one half, establishing a path to profitability is also critical. Even with high market share, renewal business andhigher automated policy purchases, employee and advertising expenses still account for 58/38 per cent of revenues in FY21 (compared to 75/64 per cent in FY19). The company metric, Contribution Margin which considers costs directly related to sales improved to 40 per cent in FY21 while the Adjusted EBITDA margin improved to -6.9 per cent in FY21 from -58 per cent in FY19.

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