Investments In Operations And High Customer Satisfaction Will Support Future Revenue Stability

Key Takeaways

• Growth in health and life insurance sectors, bolstered by strategic investments and high customer satisfaction, positions PB Fintech for sustained revenue growth.
  
• Diversification into secured business stabilizes revenue streams, reducing reliance on unsecured loans, and indicates positive future earnings potential.
  
• Heavy reliance on new health insurance and FLDG arrangements poses short-term profitability strains and credit risks despite potential long-term growth opportunities.

Catalysts

Operates an online platform for insurance and lending products in India and internationally.

• PB Fintech has witnessed a 47% year-on-year growth in its health and life insurance businesses, with health insurance approaching a 60% growth rate. This strong performance is expected to drive future revenue growth.
  
• The company's new initiatives have grown at 87% and now have a positive contribution margin of 3%, indicating future potential to improve net margins by scaling these operations.
  
• PB Fintech's secured business has rapidly expanded, going from being newly established to significantly surpassing unsecured disbursals. This diversification can stabilize revenue streams and potentially increase earnings by reducing reliance on unsecured loans.
  
• The company continues to invest in operational capacity and brand awareness, especially as its core health and life insurance businesses grow ahead of expectations, positioning itself for sustained revenue growth.
  
• PB Fintech is improving customer onboarding and claims support services, with insurance customer satisfaction reaching over 90%. This enhances client retention, potentially improving long-term revenue stability and net margins.

PB Fintech Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PB Fintech's revenue will grow by 30.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.3% today to 12.4% in 3 years time.
• Analysts expect earnings to reach ₹12.5 billion (and earnings per share of ₹26.39) by about April 2028, up from ₹2.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹15.4 billion in earnings, and the most bearish expecting ₹10.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 94.7x on those 2028 earnings, down from 312.9x today. This future PE is greater than the current PE for the IN Insurance industry at 67.3x.
• Analysts expect the number of shares outstanding to grow by 1.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.53%, as per the Simply Wall St company report.

PB Fintech Future Earnings Per Share Growth

Risks

• The slowdown in the core credit business, including a 20% year-over-year decline, could dampen revenue growth and affect the company’s overall earnings, despite rapid growth in the secured segment.
  
• Slower growth than anticipated in the savings business, which sells products like ULIPs, exposes the company to market volatility, potentially impacting revenue and net margins if the trend continues.
  
• The high dependency on fresh health insurance business, which initially comes at zero or negative margins, can strain short-term profitability, even if it supports long-term revenue growth.
  
• Capacity investments based on anticipated high growth that did not materialize can lead to excess operational costs, reducing profit margins if growth forecasts are not aligned with the actual market performance.
  
• The introduction of FLDG arrangements for unsecured loans, while meant to expand consumer segments, could introduce credit risks that impact net margins if defaults exceed the provisions made.

Valuation

• The analysts have a consensus price target of ₹1738.762 for PB Fintech based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹2370.0, and the most bearish reporting a price target of just ₹1130.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹100.4 billion, earnings will come to ₹12.5 billion, and it would be trading on a PE ratio of 94.7x, assuming you use a discount rate of 12.5%.
• Given the current share price of ₹1664.8, the analyst price target of ₹1738.76 is 4.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.