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Policybazaar is the dominant market leader in a large and growing industry with strong tailwinds such as increasing digital penetration, rising disposable income and insurance awareness. The company garnered 93.4% market share in FY20 among online insurance distributors and also remains ideally positioned to leverage its brand presence and insurer coverage to rapidly penetrate physical insurance distribution. We postulate that the company should continue deepening scale moats in light of new-found competition emerging from insurers’ direct channels and cross-sell by fin-tech players (PhonePe, Paytm etc.). We also expect Paisabazaar (credit marketplace) to grow synergistically, by leveraging the group’s digital fulfilment capabilities. We forecast Group Revenue to deliver FY21-31 CAGR of 31% led by 31%/25% CAGR in Insurance Premium/Credit Disbursals.

Our 12M target price for PB Fintech stands at INR 1,270 and we initiate HOLD on the stock. Though we see limited near-term upside vs CMP post the strong listing, we reckon there is a likely path for PB Fintech to grow to a US$13.5bn (INR 2,260/share) valuation over the next couple of years vs US$7.3bn currently, provided a few incremental levers fall into place (unlikely in the very near-term, in our view). The stock’s ability to generate further value here onwards would be premised upon: 1) Digital penetration surprising on the upside to 5.5% vs 4.5% assumed in our base case (China at 5.5% at present), 2) LIC, the country’s largest insurer by miles, joining the platform, and 3) Paisabazaar becoming a dominant player in the creditmarketplaces space.

Insurance is a long-term penetration story with distribution playing a key role: Even with INR 8.3tn in premium generated in FY21, India has one of the highest insurance ‘protection gap’ amongst global economies. Policybazaar due to its monopolistic positioning and broad insurer coverage is likely to be at the forefront of enhancing insurance penetration in the country. The company’s web portal will benefit from improving tech penetration while the recently launched physical distribution will take insurance products to peoples’ homes across the length and breadth of India. We forecast insurance business to deliver Premium/Revenue CAGR of 31%/32% over FY21-31. While we expect slight market share loss in online distribution due to insurers’ investment in direct channel and newer competition, this loss will be aptly compensated by the company’s growth in physical distribution (11% premium contribution in FY31).

Larger renewal base, tech investments and operating leverage to drive margin improvement: With incremental insurance premium generated every month, Policybazaar is building out a larger renewal base that has higher contribution margins due to minimal CAC. Simultaneously, the company’s investments into AI capabilities are expected to reduce fulfilment costs by automating customer support and policy issuance. These factors combined with operating leverage will drive operating profitability by FY26.

Initiate with a HOLD and TP of INR 1,270 with significant upside risks in the medium-term: We value PB Fintech as of Mar’30 at 8x EV/Revenue and 35x EV/EBITDA multiple to ideally factor-in long term growth as well as dilute the impact of near-term one-offs. We then discount this valuation to Dec’22 to derive our target price of INR 1,270 (5.6% upside from CMP). We initiate coverage with a HOLD rating solely due to premium valuations with significant upside risks in our “Bull” scenario that can drive share price to INR 2,200+ by Dec’24.

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