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Improvement in core business and controlled new business investment reinvigorate profit outlook (unchanged); cut in multiple factor-in any potential regulatory impact

PB Fintech’s (PBF) Q2FY23 performance was good on all counts considering that: 1) premium growth has been encouraging (absolute core insurance premiums were >Rs20bn in Q2FY23 vs Rs47bn for FY21); 2) disbursements too have been good in Paisabazaar (PAB) (H1 disbursements at >Rs52bn); 3) take rates increased in the insurance business (effect of hike and mix); 4) lower losses in new initiatives (negative contribution of Rs430mn in Q2FY23 vs Rs540mn loss in Q1FY23). Fixed costs remained range-bound at Rs1.9bn in Q2FY23. The roadmap presented by management is also positive with the aim to reach ~Rs8bn-10bn in adjustedEBITDA by FY27. Management also remains focused on its target of Rs10bn PAT by FY27. We maintain BUY with a DCF-based target price of Rs550 (earlier: Rs700) factoring-in the threat of possible competition from the proposed insurance market place (Bima Sugam). Hence, while our FY27E EBITDA remains unchanged, the implied valuation multiple on FY27E is reduced from 38x earlier to ~30x now.

* Estimate Rs9.1bn PAT in FY27E. We estimate total insurance premium income to grow from ~Rs50bn in H1FY23 to Rs452bn in FY27E. EBITDA (pre-ESOP) is expected to improve from a negative ~Rs1.2bn in H1FY23 to a positive Rs8.4bn in FY27E. This improvement would be driven by increase in renewal mix in the core insurance business (we factor-in 38% CAGR between FY22-FY27E vs 65% CAGR seen between Q4FY19 and Q2FY23), Paisabazaar and new initiatives turning profitable by FY24E end. We estimate ‘other income’ offset by tax to lead to Rs9.1bn PAT in FY27E.

* Key guidance: 1) Paisabazaar’s adjusted-EBITDA expected to be positive by Q4FY23; 2) total business to be positive in adjusted-EBITDA terms by Q4FY23; 3) reported PAT to be positive in FY24; 4) reported PAT likely at Rs10bn by FY27; 5) increase in adjusted-EBITDA in core business by Rs1.5bn-2bn every year. H1FY23 growth has been Rs900mn under this parameter, and the target is on track; 6) fixed costs will not grow by more than 10-12% annually; 7) new businesses will be contribution-positive by FY24-end; hence, they can contribute to adjusted-EBITDA from FY25 (as such, with adjusted-EBITDA breakeven in Q4FY23 and annual increase of Rs1.5bn-2bn every year in the core business, the related adjustedEBITDA could be Rs6bn-8bn in FY27; contribution from new businesses will be additional).

* Insurance take rates increased in Q2FY23 driven by: (1) rate hike in one of the life insurance products, and (2) improvement in mix. Take rates increased from 17.3% in Q1FY23 to 18.6% in Q2FY23.

* Paisabazaar (PAB) is gaining positive traction and can look at earnings upgrades. Rebound from covid has been promising. PAB is now at an annual run-rate of Rs120bn disbursal and 50mn credit card issuance. Over 31mn customers from 824 towns have accessed their credit score on PAB platform. 73% of credit cards issued in Q2 were end-to-end (E2E) digital. Co-created products like Step-up Card, Duet Credit Card are gaining traction. Company expects credit business to be adjusted-EBITDA positive by Q4FY23. Management also mentioned about renewals building up steadily in PAB (renewals are currently at similar levels to where PB was during CY18). This renewal pace will aid overall margins as the cost thereof is negligible. By FY24, PAB could have close to US$10mn in renewal revenue. Contribution margin in PAB is more than 40%.

* High-quality data disclosure remains an added feature in PBF, which could aid underwriting. High disclosure rates and fraud detection are helping improve claim settlement ratios for the partners of PB. The PB folio has 9% higher claims settlement ratio vs other channels for health insurance.

* Better than industry growth remains the core investment thesis: While there has been an industry slowdown in retail protection sales, PBF delivered 34% growth in health insurance premiums and 29% in life insurance new biz premiums in Q2FY23, which is 2-5x of the industry.

* New initiatives premium is stable which is good for margins. It also indicates lower competitive intensity: Total premiums from PB Partners (seller aggregator platform) was ~Rs4.6bn in Q2FY23. PB Partners leads the market in scale, has the highest proportion of non-motor business (20%) and has started increasing its efficiency. This is important considering that normally motor is the most targeted segment among similar aggregate platforms (B2B2C model of insurance distribution). UAE biz has grown 110% YoY in Q2FY23.

* Renewal revenue annual run-rate is Rs2.9bn as of Q2FY23 (this would have more than 90% EBITDA margin). Renewal run rate was ~Rs500m as on Q4FY19 and had increased to Rs2.9bn in Q2FY23

* Conversion rates are industry-leading at Rs1,500 per enquiry in H1FY23.

* Employee strength in PB offline (part of core business) is 1,000, while in the POSP business a total of 100k agents are enrolled.

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