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Profitability timeline improving; lower expected growth drives earnings cut

PB Fintech (PB) has reported steady Q1FY23 earnings with 12% QoQ growth in total premiums, core contribution margin slightly lower at 45%, broadly pegging new business loss to other income (annual Rs2bn), and also aiming for Paisabazaar to be profitable by Q4FY23. However, growth guidance in core adjusted EBITDA at an annual run-rate of Rs1.5bn for the next 3 years is lower than expected and reflects lower premium growth. We cut our estimates to reflect the same. Maintain BUY with revised DCF based target price of Rs700 (earlier: Rs940). Higher cash burn/marketing spends, lower premium growth and adverse regulatory changes pose key downside risks to our thesis.

* We cut our profit estimates to reflect lower than expected revenue growth. PB management indicated core adjusted EBITDA will grow by Rs1.5bn every year over the next 3-4 years. Considering margins should ideally improve with time as renewal mix increases, this would imply lower than expected revenue growth. As such, we have assumed lower core premium growth of 32% CAGR between FY22-26 now compared to 40% earlier in the core insurance business.

* Q1FY23 result has been in the right direction of increased profitability. Core premium number was not disclosed. However, overall premium (core + new initiatives) grew 12% QoQ. Renewal revenue annual run-rate is Rs2.7bn with 85% margins. Offline business now contributes almost 15% of the core business and the higher premium per employee (20x industry average) is helping contribution margin. Offline stores are now 40 and the company plans to take it up to 200 by FY24. Total employees on field for offline channel are 600 as of now. Fixed costs have been maintained steady at Rs1.79bn for Q1FY23 largely in line with Q3/Q4 trends. Expectation of contribution from new business initiatives to be offset by other income has largely been met. Q1FY23 other income was Rs475mn as against contribution loss (new initiatives) of Rs540mn. The company mentioned new business investments will largely be limited to Rs2bn which is also the other income run rate. Contribution margin print from core business largely maintained at 45% in Q1FY23 (this was 40/46% in Q3/4FY22)

* Expect FY26E adjusted EBITDA of Rs6.4bn recommend BUY with DCF-based target price of Rs700. The key assumptions are ~32% CAGR in premiums of core insurance business and 27% disbursement CAGR in Paisabazaar between FY22-26E. The contribution from core businesses is expected to clock 22% CAGR between FY22- 26E while the cumulative contribution from new initiatives will be (-)Rs5.1bn during FY23-26. The contribution margin in core business is expected to increase from 39% in FY22 to 42% in FY26E. We model new initiatives (PB Partner, corporate and international) separately and they contribute ~8% to our valuation.

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