Policybazaar dazzles on debut. Will the ‘overpriced’ stock make money in the near term? – The Economic Times

Clipped from: https://economictimes.indiatimes.com/prime/money-and-markets/policybazaar-dazzles-on-debut-will-the-overpriced-stock-make-money-in-the-near-term/primearticleshow/87765456.cms

SynopsisSince its listing, Policybazaar is holding strong, with continued investor interest. An easy-to-understand business model, robust top line, and losses under control make it a safe bet among consumer-Internet startups. However, experts believe the likelihood of higher people costs, price-sensitive consumers, and an already robust rally in the stock price may deter a strong upside.

Monday was not an ideal start for the listing of Policybazaar shares. After a lacklustre IPO by Paytm, there were concerns that the online insurance-policy aggregator might see some investors developing cold feet despite being oversubscribed 17 times.

Even Nykaa, which made a stellar debut on the bourses, saw its stock tankon Monday after the announcement of its quarterly results, as investors questioned a share pledge by promoter Falguni Nayar. Separately, Goldman Sachs and CLSA downgraded Indian stocks,stating that upside was limited.

However, beating the Monday blues, Policybazaar’s holding company PB Fintech Ltd’s shares rose 23% from the issue price, giving a clear indication that investors are still hungry for tech stocks. On Tuesday, it was up 11.5% and on Wednesday it gained another 8%, taking the SoftBank-backed firm’s market cap to INR65,015 crore. Investors have reposed their faith in the 13-year-old company and its founder Yashish Dahiya despite the blip in the last financial year.

However, some analysts feel the issue is overvalued. It could still be a long-term buy but if the market falls, the newly listed companies including Policybazaar, which are yet to make profits, might see a decline in their stock prices. But then, these are startups, and a lot depends on founders and their ability to take pressure in subdued markets.

Analysts feel that Dahiya is ambitious and can manage the show even if it is a tough business with no entry barriers and clients can buy the product from the direct channel.

“Right now, the market is excited about all these Internet and technology-backed stocks because there is a promise of 30%-40% growth. But for an investor to make money from here, the company will have to deliver such growth not only for one or two years, but for 10 years,” says Digant Haria, co-founder of investment-advisory company GreenEdge Wealth.

On November 16, JM Financial initiated coverage on Policybazaar with a ‘hold’ rating and said it valued the company as of March 2030 at an average of 8x EV (enterprise value)/revenue and 35x EV/Ebitda. “We then discount the March 2030 valuations back to December 2022, assuming a discount rate of 11%. Our (12-month) target price of INR1,270 per share implies around 6% upside to the CMP (current market price), implying EV/FY23 revenue multiple of 25x,” it said in a note.

The brokerage said though it sees limited near-term upside after the strong listing, it reckons there is a likely path for the company to grow to a USD13 billion market capitalisation (INR 2,260/share) valuation over the next couple of years versus USD8.7 billion currently, provided a few incremental levers fall in place, which are unlikely in the very near-term.

JM analysts said the stock’s ability to generate further value would depend on digital penetration surprising on the upside to 5.5% versus 4.5% assumed in the brokerage firm’s base case; LIC (the country’s largest insurer by miles) joining the platform; and Paisabazaar becoming a dominant player in the credit-marketplaces space.

JM forecasts the company’s revenue to deliver an FY21-FY31 CAGR of 31%, led by 31% and 25% CAGR in insurance premium and credit disbursals, respectively.

Up for a long-term play?
In China, only 5% of policies are sold online, while in the US, it is just 13%. One of the reasons is that the insurance sector sells highly complicated products and need handholding for health and term plans, which generate the most profits. So, increasing digitisation will not guarantee hyper growth or large profits and the handholding is heavily dependent on hiring more employees. Hence, the advantage that most digital companies have is that non-linear growth might not pan out as expected.

“Policybazaar is a long-term buy, but markets are near highs, and global liquidity is high. So, if that trend is reversed, and the markets fall, this stock and other New Age companies may see a steeper decline.”

— Sanjiv Bhasin, director, IIFL Securities“Insurance is still a complicated product in India due to the need for guaranteed returns, bonuses, and life cover. Hence, we still need human intervention to push sales in the majority of cases. Also, the elite in India is used to getting some money back from their agents. Thus, Policybazaar cannot do away with the people-heavy model and will need to raise funds periodically if it has to grow fast,” says Haria.

Policybazaar’s employee cost (see chart) has risen linearly with its top line, with no evidence so far of how the company could break out of this trend.

Haria also points out the competition from traditional insurance companies. ICICI Lombard, India’s largest private general insurer, has a market cap of around INR75,000 crore, but its revenues are 10x of Policybazaar and has INR1,500 crore of profits to boot.

The business requires aconstant raising of capital as it battles to win a share in an extremely price-sensitive market.

“Policybazaar has built something valuable. There is no doubt about it. It’s a fintech company and has good business growth, but someday someone will ask, ‘When will the profits come? Will they come any time soon?’ Unlikely. The company raised some funds six months before the IPO at 60%-70% less than the issue price, and now this surge. If the company doesn’t deliver in growth and profits, the stock may languish,” he adds.

The larger concern is that there will be no wiggle room when the bull market ends, and the stock may go down. The questions over “pricing to perfection” bothers everyone.

“[From] a lot of these new issues, some may become very big outperformers, but some will go down in the dust. The IPOs are priced to perfection,” says Sanjiv Bhasin, director of financial-services company IIFL Securities. “Policybazaar is a long-term buy, but markets are near highs, and global liquidity is high. So, if that trend is reversed, and the market falls, this stock and other New Age companies may see a steeper decline.”

Faith in the founder
There are reasons to believe that the company could emerge stronger in the near future. In late 2012, when Inventus India Advisors gave a term sheet to Policybazaar, Dahiya took a call in under 45 minutes. Dahiya called Parag Dhol, managing director of Inventus, who was on his way to the airport from the Policybazaar office, to agree to the term sheet. After Dhol left the office, Dahiya managed to convince his existing investors and top management within 45 minutes.

“The valuation was only 40% higher than what was given by Intel Capital in the previous round, which happened 18 months ago. But Dahiya is always confident and sure about what he is doing and can make decisions quickly, which has helped the company to be an unchallenged market leader,” says Dhol.

Venture-capital investors are not the only ones putting faith in Dahiya. There are 50 top-level employees who have stayed for almost a decade in a startup that is only a little older than that. “Of all founders we have worked with, Dahiya is someone we are sure is the most competitive and has the discipline to take on any competition,” Dhol adds.

In FY17, Policybazaar had a revenue of INR208 crore. In FY21, the company reported revenues close to INR1,000 crore — five-time growth in five years. This did not come at the cost of burgeoning losses, which were well under control. It is despite the company having multiple competitors.

Policybazaar- financial snapshot@2x

While quarterly results could cause the share price to be volatile, the large international investors will hold the fort. “These are large international funds that have a long-term view of the market and companies. They are going to stay put for three to five years and won’t get swayed by sentiment or a few quarterly results,” says Mohan Kumar, founder of venture-capital firm Avataar Ventures.

Compared to Paytm, one thing that works in Policybazaar’s favour is its easy-to-understand business model. It is a market leader with around 90% of digital insurance being sold on the platform.

“It is a model that has returned profits in the offline world, and the company can do so too. The digital nature and the stable platform mean it is not dependent on linear growth of expenditure for its top-line growth. The traditional business-model valuation cannot be applied to Policybazaar. They can grow by buying out offline agents and brokers, as they have been planning recently,” says Kumar.

While it continues to grow rapidly in the digital world, Dahiya has also taken the offline and agent route to aggressively grow its top line. A lot of insurance policies are still sold by agents, as it is a push product and awareness alone cannot drive a change in customer behaviour. Co-opting them as well as establishing an offline network will ensure that newer competition such as Turtlemint can be taken on very early. Since these agents are not on the company’s roll, the top-line growth will not come at the cost of increased employee expenses, which forms almost 50% of its expenditure today. But this does reduce the company’s margins and might not go well with investors.

The valuation game
Anurag Singh, managing partner of US-based Ansid Capital, says that some of these New Age consumer-tech companies are rushing to list, as there is money to be made in the bull run, but that’s a wrong attitude to go for an IPO. “There is a hurry to list. Valuation for all of them seems to be following a playbook of 45 to 50 times sales. Policybazaar raised USD75 million in March, and has INR1,000 crore lying as cash in its accounts. You don’t need this funding,” he says. Singh’s firm does not have any exposure to Indian markets.

According to him, all companies’ shares can give returns to investors as long as the price is right, and assuming the company gets a lot of things right and grows.

“They are just kind of trying to adopt the playbook of companies that got listed in the US, such as Airbnb, Uber, and Lyft. These companies were beneficiaries of the pandemic in the US, because during the lockdown, you could only go digital. So, they wanted to time it perfectly. And 2020 was that year, at least in the US. But since then, the euphoria has tapered off,” adds Singh.

Performance of recently listed -US new-age companies @2x

Some of the US companies or some segments of the business are profitable or on the verge of profitability. However, the same cannot be said about Indian companies with much lower average selling price and even lower margins.

In India, many of these companies have seen flat growth and they attributed it to the pandemic and lockdowns. While the lockdown was harsher in the initial phase, restrictions were much more lenient in India than in the West in the following months.

Veteran investor Mark Mobius feels that in a bull phase, a lot of these companies looking for money will come into the market and hype the future. “People will look at the company and say, ‘God, this is going to be a great thing for the future. Therefore, I put money in.’ But I would say a year or two from now, some of these companies will not be doing so well, they may even go down under. So that’s the problem, when you have a big bull market, a lot of the less-viable companies come into the market to raise money,” he says.

Mobius says that several people compare most New Age companies to the likes of Amazon, which was losing money for a long time, and later delivered profits. “That is one of the hundreds of Amazons who tried the same thing but were not so successful. So, you just got to make sure that you look at this very carefully, and not get carried away with the momentary popularity,” he warns.

The challenges
Compared with others that have gone for IPOs, Policybazaar neither has a product of its own nor strong brand recall that will draw customers week after week. But that could also be attributed to the nature of the product it is selling, which beyond LIC’s life-insurance policies, is still a niche segment in India. It is a push product, where buyers often need to be coaxed.

While low penetration has often been touted as a key factor that will drive the company, the projections of the past have not worked in the sector’s favour. For instance, Policybazaar’s DRHP says that Indian life insurance premiums will grow at 18% CAGR from 2021 till 2030. BCG had projected life insurance to grow 8x from 2011 to 2020 to a premium of INR20 lakh crore. But it could muster a measly INR5.7 lakh crore in 2020. The projected CAGR of 25% ended up just 4% for the decade.

“The risk is that the disruptive potential of these brokers could be overestimated,” says Singh. Of all the startups going for a public float, Policybazaar’s net promoter score is among the lowest.

People often look at the success of Zerodha, Upstox, and Groww and the general growth of investments and expect a similar growth trajectory for other financial services. “It is a fallacy. When you are investing in stocks, you can invest in small sums or large sums. There are options where you don’t need to commit to investing every month. In India, everything that can be sold in sachets works well. While some policies could be sold similarly, those are not high-margin ones and companies don’t have the marketing budget to aggressively promote such plans,” says a senior executive with an online-insurance aggregator. For instance, some companies offer dengue plans, but because of the lack of awareness, they have not taken off. Term insurance and health insurance give companies almost 50% of their profits.

Also, some brands are wary of platforms that compare them with other players, which would not always work against the expensive ones. Reports suggest that some bigger insurance companies have pulled out of such platforms and are trying to reach customers directly or through agents.

“The direct-to-consumer model of some larger insurance companies is mostly a knee-jerk reaction, as they are reflecting poorly on comparison platforms, and it is actually a loss to them,” says the senior executive quoted earlier. However, consumers are comfortable with certain brands and such aggressive customer-attraction tactics could result in slower sales for Policybazaar.

While Policybazaar remains a marketplace, it does stake out its credibility by helping customers to choose a plan as well as in claims and refunds. “However, when they expand in the offline segment and POSP (point of salesperson), the agents usually entice customers towards plans with a higher commission, not necessarily the best ones. This puts their credibility at risk,” says the executive.

The outlook
One thing that helps these companies is the low float — mostly 10%-15% are being offloaded as of now — and that scarcity helps them shore up the valuation, as the demand for a piece of New Age consumer-tech companies remains high.

However, once the hype subsides, the company will have to look for ways to be profitable, though Dahiya has said that there was no pressure to do so.

“You have to intelligently plan on how long you can continue to be loss-making without doing damage to the company’s share price,” says Kumar.

To its advantage, Paisabazaar, a marketplace for loans and credit cards, could do well. Retail credit has seen good growth in the last decade and this, along with a large trove of consumer data, could help the company become a go-to partner for banks and insurance companies.

Dhol says that Dahiya’s discipline could help him bring the same rigour to the company. “While he is extremely competitive, he will drop out if things don’t work. His deep understanding on how commissions work today and the foresight to see how it will evolve in the next five years will help him plan ahead. While he can be fearless and blunt sometimes, CFO Alok Bansal can keep the company stable and grounded. It is a great team.”

(Graphics by Mohammad Arshad)

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