PB Fintech (Policybazaar) shares rose over 2.5 per cent on Thursday. Given the fact that Policybazaar is expected to remain the dominant insurance distribution platform in India, JM Financial Services has upgraded PB Fintech stock to ‘BUY’ rating. Since touching an all-time of Rs 1,470, PB Fintech share price has corrected around 50 per cent despite the company reporting 44 per cent on-year 9MFY22 revenue growth. However going forward, the brokerage expects PB Fintech shares to rally over 40 per cent in a year. The stock was quoting Rs 728 (up 2.72%) on the Bombay Stock Exchange (BSE) intraday.
PB Fintech (Policybazaar) stock rating: BUY
Target price: Rs 980
JM Financial has upgraded the stock to ‘Buy’ with March 2023 target price at Rs 980 as it believes that the Indian insurance industry has strong secular tailwinds driving sustained long-term growth and Policybazaar will continue dominating insurance distribution in India across offline and online. “With markets seeing significant volatility due to potential rate hikes and the Ukraine war, we have used the DCF valuation methodology for PB-Fintech as an intrinsic valuation approach seems more plausible. With the cost of capital expected to rise due to the monetary policy tightening environment, we also increase our discounting rate to 12%,” the brokerage said.
Why are analysts bullish on PB Fintech?
Gaining enhanced market share: Policybazaar’s total and new insurance premium (excluding PoSP) has grown 38%, 34% respectively on-year in 9MFY22 despite a sluggish industry environment with general insurance premiums growing 11% and life insurance new business premium (NBP) growing 7%. Policybazaar’s growth rates at 2-4x of the base industry already imply that the company is gaining enhanced market share of the overall insurance distribution in India.
Significant headroom for future growth: IRDAI Life Insurance data suggests that India had Rs 1,13,800 crore new individual life insurance premium generated in FY21. As LIC has joined hands with Policybazaar only recently then looking only at Rs 57,400 crore of NBP generated by private players, data suggests that around 10% of their NBP came from individual protection, implying FY21 Protection TAM for Policybazaar of Rs 6,000 core.
Additionally, Motor, Retail Health, Personal Accident and Liability premium was Rs 1,02,500 crore in FY21. Assuming that only 50% of motor insurance belonged to passenger vehicles and 2-wheelers, a general insurance TAM of Rs 69,000 crore is left. With NBP of Rs 2,700 crore in FY21, Policybazaar accounted for ~3% of the overall TAM of Rs 92,000 crore in FY21, implying significant headroom for future growth. “Furthermore, the recent partnership with LIC and the foray into corporate/SME insurance provides significant upside to potential TAM available for Policybazaar,” said JM Financial in its note
PB Fintech has potential to engage with customers 4-5x annually: According to JM Financial analysts, while other internet peers such as Zomato, Nykaa, Paytm etc have multiple, frequent touch-points with the customers, Policybazaar has relatively lower engagement metrics as insurance tends to be an annual purchase, mostly.
“However, across its two platforms, Policybazaar and Paisabazaar, PB Fintech has the potential to engage with customers 4-5x annually. A customer can buy/renew auto insurance, health insurance, life insurance along with travel insurance while also simultaneously checking their credit scores, applying for personal, auto or home loans as well becoming lead for credit cards,” they said.
The brokerage hence believes that while touch-points for PB Fintech might not be as frequent as their peers, the company does have the potential to attract users to the platform multiple times in a year. Additionally, life and health insurance have renewal rates upwards of 60%, enabling very high retention metrics for the company and also driving margin expansion.
Renewals business to be the strongest driver in margin expansion: In recent times, the company has seen rapid improvement in Adjusted EBITDA margin (excluding ESOPs) to reach (6.9%) in FY21 since dipping to (58.0%) in FY19. While the bounceback in advertising expense and launch of new initiatives such as PB Partners and PB Corporate is expected to impact margins over the near-term.
JM Financial expects the company to achieve operating break-even by FY25. “The certainty of Renewals business is expected to be the strongest driver in the company’s margin expansion with Renewals revenue estimated to be at 80%+ contribution margin,” it said. Analysts further expect PB Fintech to have a contribution margin of 27.5% in FY25 that would be able to recoup the fixed costs of Rs 928.6 crore.
No immediate threat from peers: According to JM Financial Services note, larger fintech players such as Paytm and PhonePe have been trying to turn the monetisation engine by launching insurance distribution as well. While these players can continue increasing their market share in product categories such as auto and travel insurance, they will “struggle in ramping up presence in complex product categories such as health or life insurance due to the lack of a dedicated and experienced call centre expertise”, said JM Financial analysts.
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