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Margin expansion sustained with breakeven guidance reiterated

PB Fintech reported another quarter of strong results with sequential revenue growth of 14% and adj. EBITDA margin expansion by 432 bps. While insurance premium growth was subdued at 5% QoQ, credit disbursals grew sturdily at 26% QoQ. Group revenue reached INR 5,735mn (+105%/14% YoY/QoQ), led by 77%/94% YoY growth in insurance premium / credit disbursals. We understand that online insurance premium was sequentially flat at around INR 18bn with growth primarily driven by new initiatives. These new initiatives (PoSP, International and Corporate/SME insurance) contributed INR 1,640mn to revenue in Q2FY23 (22% QoQ) through continued expansion of PoSP agents and strong traction in UAE. Paisabazaar continued surprising positively with sequential revenue growth of 20% with breakeven guidance in Q4FY23. The strong topline growth enabled high operating leverage playing out and EBITDA loss narrowing sequentially by 696bps and adjusted EBITDA margin (ex-ESOP) reaching -9%, a beat on JMFe of 418 bps. Furthermore, management has reiterated its guidance towards an adjusted EBITDA breakeven in Q4FY23 and positive PAT by FY24; also laid down its long term vision to achieve INR10bn of PAT by FY27. We reiterate ‘BUY’ rating with an unchanged Sep’23 TP of INR 910 (136% upside) and continue to see the company remaining the dominant insurance distribution platform in India despite the regulatory headwinds. We would want to recap that pre-IPO shareholders’ lock-in expiry is due on Nov 15th , 2022 and there could be sharp movements in the near-term.

*Online premium growth sluggish due to industry struggles: While Policybazaar’s overall insurance premium grew 5% QoQ, we estimate that online insurance premium remained flat with growth driven by the new initiatives (PoSP premium increased from INR 4,125mn to INR 4,580mn). However, life insurers’ earnings calls suggest that term insurance is stabilising and could return to growth in H2FY23. Meanwhile, insurance revenue grew by 12% QoQ, suggesting that the commissions are rising – mix of non-auto (higher commission) in offline premium rose to 20% while guaranteed return plan enables commission improvement in online premium. The company continues to ramp-up its new initiatives that contributed INR 1,640mn in revenue driven by strong PoSP network and growth from UAE business (premium up 110% YoY).

* Continued profitability trend in core Business (Policybazaar and Paisabazaar): The Company saw its core business continuing the profitability trend with INR 120mn in Adj. EBITDA for the quarter. Policybazaar generated INR 180mn while Paisabazaar lost INR 50mn and New Initiatives losing INR 650mn. Management expects core business profitability to consistently improve with PB Fintech achieving Adj. EBITDA breakeven in Q4FY23 and adding incremental Adj. EBITDA of INR 1,500-2,000mn every year with FY27 PAT reaching INR 10bn. Further, management anticipates New Initiatives burn to drop to INR 300-350mn by Q4FY23.

* Maintain ‘BUY’, Sep’23 TP of INR 910: We estimate PB Fintech to continue dominating insurance distribution in India driven by its omni-channel play and continued focus on enhancing insurance penetration via New Initiatives sustainably. We have raised our revenue forecasts for Paisabazaar and lowered consolidated EBITDA losses marginally over FY23-24E, resulting in TP of INR 910. However, our steady state EBITDA margin remains the same and earlier margin improvement implies slower margin improvement in the later years. Key Risk: Regulatory headwinds have been rising with Bima Sugam being pushed by IRDAI.

* Paisabazaar continues to grow with strong disbursals and improved profitability: Credit disbursals on Paisabazaar have grown 26%/94% QoQ/YoY to reach INR 29.2bn in Q2FY23 with credit growth continuing in this quarter as well. The company also enabled issuance of 500k credit cards on an annualised basis in Sep’22. Paisabazaar generated revenue of INR 1,010mn, contributing to 18% of overall revenue with Adj. EBITDA loss of INR 50mn. The management reaffirmed its guidance towards Paisabazaar breaking even in Q4FY23. We have finally decided to upgrade our conservative stance on Paisabazaar and that gets reflected in a rise in revenue and market share.

* Improved mix of New business and renewals during the quarter: Company reported 35% sequential growth (+33% YoY) in new business premium during the quarter while renewals moderated sequentially to decline by 23% (+66% YoY), resulting in a healthy mix and improvement in blended take rate. Health and life insurance premium grew by 34% and 29%, respectively, and stood at c.77% of the overall premium against c.75% in 1QFY23.

* Enhanced disclosures and continued focus on shareholder value creation: In 2QFY23, the management was positively upfront over the call and also mentioned that disclosures would improve in the coming fiscal year as they “continue to learn”. We believe this is a step in the right direction and would help shareholders better understand the business. Management also mentioned that once it turns profitable and generates INR 1bn+ adj. EBITDA (probably before FY25), it would lay down the plan for utilisation of its existing cash balance; management hinted towards a possible distribution of this excess cash to the shareholders as well.

*Confident of Bima Sugam to be positive for the industry but more clarity awaited: The company believes Bima Sugam will act as GDS (Global distribution system), which would be positive for the overall industry but awaits on more information as it is still an evolving subject. Company is in discussions with the regulator and have sought more clarity on operational aspects of Bima Sugam.

*Business fundamentals in place ahead of lock-in expiry: PB Fintech continues to grow both Policybazaar and Paisabazaar liberally with profitability at a touching distance. The recent omnichannel foray in core business ensures that premium per enquiry has gone up for the company due to improved conversion rate. Such sound business metrics do point towards strong valuation upside but the company is nearing one year since IPO and is expected to see a large supply of pre-IPO shares becoming available to trade.

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