Transition To Capital Guarantee Products Will Meet Market Demand But Overinvestment Risks Remain

Key Takeaways

• The transition to capital guarantee products aligns with market demand and could sustain revenue growth by improving net margins with higher-margin offerings.
  
• Investment in operational expansion and focus on customer satisfaction are set to enhance customer acquisition and retention, driving long-term profitability.
  
• Sustaining high growth in health and life insurance, managing overinvestment pressures, and aligning PoSP margin expectations are critical for profitability amidst new venture investments.

Catalysts

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

• The growth in the health and life insurance business with a 69% increase year-on-year in new premium for the quarter suggests strong future revenue potential as this segment continues to expand. This is likely to positively impact revenue.
  
• The transition from unit-linked products to capital guarantee products indicates alignment of the product offering with market demand, which could sustain revenue growth and potentially improve net margins due to potentially higher margin products.
  
• The 87% growth in new initiatives, which are no longer making losses at the contribution level, points to expanding business lines that could enhance overall earnings as these initiatives become profitable.
  
• Investment in operational expansion, such as building the feet-on-street capacity and enhancing customer satisfaction, is expected to support sustained growth in customer acquisition and retention, likely driving revenue growth and long-term profitability.
  
• Improving renewal rates with a growth of 45% and operating at an 85% margin provides high-margin revenue streams that could bolster future earnings and overall profit margins.

PB Fintech Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PB Fintech's revenue will grow by 28.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.1% today to 14.2% in 3 years time.
• Analysts expect earnings to reach ₹12.6 billion (and earnings per share of ₹26.67) by about December 2027, up from ₹2.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹14.7 billion in earnings, and the most bearish expecting ₹9.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 89.9x on those 2027 earnings, down from 471.5x today. This future PE is greater than the current PE for the IN Insurance industry at 13.1x.
• Analysts expect the number of shares outstanding to grow by 1.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.15%, as per the Simply Wall St company report.

PB Fintech Future Earnings Per Share Growth

Risks

• The slowdown in the unsecured credit segment lasting longer than anticipated, driven by high growth in previous years, regulatory guidance, and specific actions around moderating credit growth, could negatively impact revenue and profits in the credit business.
  
• The core health and life insurance business, while experiencing phenomenal growth, has a stated mid-term guidance of approximately 30% growth. Sustaining the current 60-70% growth rates could prove challenging, potentially affecting future revenue expectations.
  
• Higher operating expenses due to overinvestment, primarily in anticipation of continued growth for Policybazaar, could put pressure on net margins if growth does not meet expectations.
  
• PoSP (Point of Sale Person) business, although growing rapidly, is fundamentally a low-margin, high-scale business. If margin expectations from this business are not aligned with its inherent characteristics, it could impact overall earnings and profitability.
  
• The company is suggesting potential $100 million investments in new ventures like PB Health, which could affect free cash flow and alter the focus from core business operations unless the anticipated benefits are clearly realized.

Valuation

• The analysts have a consensus price target of ₹1700.95 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 ₹2550.0, and the most bearish reporting a price target of just ₹1220.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹88.6 billion, earnings will come to ₹12.6 billion, and it would be trading on a PE ratio of 89.9x, assuming you use a discount rate of 12.2%.
• Given the current share price of ₹2165.0, the analyst's price target of ₹1700.95 is 27.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.