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Is downside risk insured post lock-in expiry?

Info Edge has continued to hold on to its stake in Zomato despite the mandatory lock-in expiring in July 2022. Another portfolio company of Info Edge, PB Fintech (Policybazaar) will also see its pre-IPO shareholders’ lock-in expire on Nov 15th, 2022. While Info Edge has communicated that they might want to “hold as long as the business has legs to multiply money”, each pre-IPO investor might have their own rationale for holding on or liquidating the stake. With almost ~62% of PB Fintech’s share capital becoming eligible to trade, the size is certainly large enough to have an impact. However, we also note that most of these investors have already generated liquidity from this particular investment via OFS and secondary sales prior to the IPO. A similar scenario was seen with CarTrade that did not see any adverse impact of lock-in expiry. In comparison, only Sequoia and Ant Financial among Zomato’s pre-IPO investors did generate liquidity on their investment prior to the IPO and Ant Financial has not yet diluted any stake post the lock-in expiry. Additionally, our cost of acquisition analysis suggests that the range of acquisition price per share for the shareholders getting unlocked is INR 48-INR366, implying modest to high upside for the majority of them. We anticipate that the current trading valuation could be attractive for the pre-IPO investors to continue holding but they could still liquidate for different reasons. We have a ‘BUY’ rating on the stock with a Sep’23 TP of INR 910 and believe that any dip due to an open market sale by any of the pre-IPO investors should be viewed as an accumulation opportunity.

* 62% of share capital opening up with AIF / FVCI investors unlocked earlier: With 28mn shares opening up on November 15th , 2022, along with 4mn shares that were already unlocked for AIF / FVCI investors, the float for PB Fintech is expected to go up significantly. With such significant supply opening up, even a small segment of investors deciding to sell in open markets can cause abrupt movement in share price. Just for a high-level comparison, Zomato shares declined by 20%+ when Uber and Tiger Global sold stakes until the company reported picture-perfect results that brought back the buyers to absorb the sales

* Some pre-IPO investors have already received liquidity: Of the 9 locked-in financial investors holding 1%+ share capital of PB Fintech, 3 have already generated more cash than they invested via OFS and secondary sales prior to the IPO. While this does not necessarily imply that they will not liquidate further, it does potentially rule out further selling just to diversify their portfolio or to book profits. As we highlighted prior to CarTrade’s lock-in expiry, a combination of reasonable current valuation multiples and pre-IPO investors already receiving liquidity earlier resulted in minimal share price impact post the lock-in expiry.

* Current market price implies 17%/3% cost of capital/terminal growth rate: Current market price of PB Fintech implies ~17% cost of capital and 3% terminal growth rate in our DCF based valuation. Considering the current industry positioning and clear path to profitability guidance provided by the management, such high discounting certainly seems brutal. Furthermore, PB Fintech is trading at 5.9x FY24E Sales, implying almost no growth premium to its global peer in the USA, Goosehead Insurance, which is trading at 5.5x CY23E sales, as per Bloomberg. Closer home, PB Fintech also trades cheaper to its India-Tech peers that trade at an average FY24E sales multiple of 8.8x. These comparisons and implied assumptions suggest that PB Fintech is trading at a cheap valuation and could have a decent upside potential.

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