Policybazaar IPO — Should Investing Be the Best Policy?
PB Fintech, the parent company of Policybazaar, filed its prospectus with SEBI yesterday to raise ₹6,017.5cr ($811m) via an IPO that is slated for a December listing.
Policybazaar is an online insurance brokerage and fintech company that allows users to compare and buy policies without seeking the help of conventional agents. It also has a digital lending platform called Paisabazaar.
Policybazaar is currently one of the largest insurance-selling portals in the country. Its IPO will be the fifth one applied for by a startup company in India this year (after Zomato, Paytm, MobiKwik and CarTrade).
Fast Facts
The IPO is sized at ₹6,017.5cr divided into ₹3,750cr ($505.6m) (Fresh Issue) and ₹2,267cr ($305.6m) (Offer for Sale). Existing shareholders like SoftBank’s Vision Fund Python and Policybazaar’s founders are expected to take partial exits. The company is also planning to raise upto ₹750cr ($101.1m) by way of private placement of equity shares ahead of the IPO, which, if successful, may accordingly reduce the size of fresh issue.
SoftBank, Tiger Global, Info Edge, Falcon Edge, Alpha Wave and Claymore Investment are some of the major shareholders (the first three also backing Zomato, another startup that went public recently). The proceeds are proposed to be used primarily for business expansion, funding strategic investments and enhancing the “visibility and awareness” of the company’s brands.
Like Paytm, Policybazaar’s board has decided to list the company as a “professionally-managed company” without any identifiable promoter. However, Yashish Dahiya, the co-founder and CEO, will continue as the chairman and executive director post-listing.
In order to streamline the listing process, the company has increased the NRI/OCI investment limit from 10% to 24%. Its outstanding convertible preference shares have also been turned into equity shares.
Company Profile
Policybazaar was founded in 2008 and currently operates in India and select markets across the Middle East. As per Business Insider’s valuation, it is the sixth highest-valued fintech startup in India as of March 2021. The company has capitalised well on the boom in the insurance sector and emerged as a market leader in policy sales online (93.4% share based on number and 65.3% share based on volume).
However, the insurance market in India is significantly under-penetrated. So, the presence and expanse of services through online aggregators like Policybazaar constitutes less than 1% of the industry. But at the same time, the unexplored industry presents immense opportunity for growth.
This also explains increasing competition in the space among players like Paytm (which is launching its own IPO), PhonePe, BankBazaar, PineLabs and big new entrants like Acko General Insurance which is backed by Amazon.
Policybazaar, the insurance web aggregator, accounts for nearly 70% of the total operating revenue of its parent. This is mainly driven by an insurance commission (a % of the premium) received from insurance partners. Premium originated from the platform has seen an impressive 41.7% CAGR growth over two years with new premiums and renewals both driving growth — a healthy sign typically.
The remaining 30% is constituted by Paisabazaar and other entities which is largely a % commission on total loans disbursed by the lending partners. Total loan disbursals from the platform saw a pull back in 2021 (on account of general COVID-19 driven risk off in the sector) but still operates at a fairly healthy level.
Financial Landscape
The company has a history of losses (past three years particularly) and even anticipates increasing expenditure and costs in the future. It did manage to cut down losses by almost half in FY21. However, given the general outlook of internet companies in India, it doesn’t particularly stand out as far as the loss-making criteria is considered.
Back in around 2018, PolicyBazaar was marching fast and high on the back of a rising fintech wave and managed to upstage rivals like BankBazaar, which, despite their revenues, couldn’t keep up with Policybazaar’s growth. The differentiation in insurance and lending platforms on Policybazaar has helped the company benefit from the economies of segmentation and consolidate its business.
However, the pandemic has caused its fair share of impact on the company’s business by eating away at its lending business. Paisabazaar laid off over 1,500 employees last year to cut costs amid fall in new customer acquisitions and origination of loans.
Those losses may have been mitigated to a certain extent with a spike in demand for pandemic insurances like life, health etc. (the insurance industry saw a 53% quarterly jump in new business premium in Q2FY21).
But the company’s overall expenses remain high, despite its emphasis that its business is based on a capital efficient model with low operating costs. Policybazaar insists that it is merely an aggregator and facilitator of credit and insurance products and doesn’t bear any underwriting or credit risks itself.
That may have been true except for one material development that occurred last month. The IRDAI issued Policybazaar with an insurance broking license changing its business model from a sole web aggregator status.
This has opened up new avenues of business for the company like claims assistance, offline services, points of presence networks etc. Which will in turn expand its commissions and fee bases. But this also means that it is no longer simply an intermediary in the process but a qualified disseminator of insurance and credit packages.
Breaking Down the Brokerage
As of now, no other listed entity operates in the same business as Policybazaar so there is no yardstick to compare its potential market performance. However, looking at the hotcake status of the fintech industry and the fact that many others are scoping their market entries lately, competition for user acquisition and market share remains intense.
Given its presence in both the digital lending and insurance space, Policybazaar falls under the troika of regulatory review consisting of SEBI, RBI and IRDAI. It has faced scrutiny (and penalty) by these agencies for flouting SMS advertisement norms and non-compliance with investment advisory rules in the past.
The company has also fallen victim to data breaches. It is a “foreign owned and controlled” company due to the large stakes by foreign investors and hence could be affected by changes in macro level policies like FDI or foreign exchanges.
There has also been an observed shift from online to offline models of insurance businesses by legacy firms (e.g HDFC Ergo, ICICI Lombard etc.) lately in a quite counterintuitive fashion to digitisation of the consumer economy. Policybazaar is also planning an offline push by establishing its presence in 15 stores across 100 locations in India.
This could be a profitable gambit if it results along its intended course by gathering more customers and expanding a brick-and-mortar presence in the less digitally connected areas. At the same time, it could add to the costs for the company. Plus, the dependence on lending partners for commissions and fees could mean that revenues are largely influenced by changes in interest rates and other market variables.
Having said that, for a market that is estimated to be valued at ₹7.6trn ($102bn) in total premiums (FY20 numbers) across life and non-life insurance and is projected to grow at 17.8% CAGR to reach ₹39trn ($520bn) by FY30, simplification and integration of value chains remain crucial to success.
It depends on how cogently Policybazaar adopts innovation in its products and processes and works on maximising earnings from its 48.8 million large consumer base with 9.6 million transacting consumers and sets the bar for future public listings in the insurtech space in India.
(Originally published August 5th 2021 in transfin.in)
