PB Fintech (Policybazaar and Paisabazaar) is hitting the capital markets with an IPO, and is currently at a crossroads. After growing for nearly 13 years as an online insurance policy and loan aggregator, the company received its insurance broker’s licence from the Insurance Regulatory and Development Authority of India (IRDAI). This means it will now focus on setting up physical branches to source customers for its insurance and lending customers.

This makes the fresh use of its IPO funds interesting. The up to Rs 5,710 crore IPO consists of a fresh issue of Rs 3,750 crore and an offer for sale worth up to Rs 1,960 crore by existing investor Softbank, CEO Yashish Dahiya, CFO Alok Bansal, among others. The issue opens on November 1 and closes on November 3. The issue price band is Rs 940-980 per share. The company raised Rs 2,569 crore at Rs 980 per share through anchor investors on Friday.

This values the company at the upper band at over Rs 46,000 crore. This is higher than India’s largest non-life insurer The New India Assurance’s market capitalization of around Rs 25,000 crore. At its FY21 revenue of around Rs 887 crore, the company is valued at nearly 52 times (market capitalisation-to-sales). On its annualised expected FY22 revenues, it’s valued at around 48 times.

Although the company’s shares will enter a volatile secondary market, it’s one of the many issues that are open or are lined up over the next few days. Is this market leader in the online insurance marketplace worth your while?

No break-even yet: Cash guzzling business, now pivoting to offline model

PB Fintech consists of two main companies — Policybazaar and Paisabazaar. The former is a marketplace for insurance products — life insurance and non-life insurance — and the latter is a marketplace for loans and credit cards. The standalone PB Fintech entity offers marketing and consulting services to its customers.

PB Fintech’s revenues come from insurance commission, sale of leads, outsourcing services, marketing services, online consulting and marketing, commission on aggregation of financial products.

Although the company still hasn’t broken even, its revenues are growing at a fair clip. Now the company is also expanding its insurance broking business for which it will set up 200 offices over the next four years. The company already has 15 offices for this business. These offices will have limited staff and will be situated near insurers’ offices in cities. The company expects to spend nearly Rs 150 crore to set up new offices till FY25 and another Rs 75 crore to set up a point-of-sales agent network.

This shows that the company’s business is guzzling cash. It has not posted a profit in the past three completed financial years, despite its revenues rising at a fair clip.

The expectation is that as the company expands its businesses in the life insurance and non-life insurance space, the cost of acquisition for acquiring customers who renew their insurance policy will be marginal. This will only be needed for new customers. At the end of FY21, the company had earned its insurance partners nearly Rs 4,700 crore insurance premium, nearly 60% from new business premiums. Renewal premium made up a little over 41% of the premium paid by PB Fintech’s customers.

Still, the company needs a lot of cash to eventually break even. Even though it posted marginally positive operating cash flows in FY21, it will continue to need funds to run its business.

 Whether the expectation of break-even in four years is achieved, the company is the market leader with over 91% share of the online insurance aggregator market. It also has a 51% share of the online digital retail credit aggregator market.

This is where investors have to take a call whether investing in another platform company that’s not making any money, makes sense.

Life insurance commission concentration is a key risk

One factor that investors should consider is the company’s high concentration of the top five life insurance customers to whom it offers its platform services.

When it comes to non-life customers, the revenue concentration is not that big a red flag.

Another risk factor investors should keep in mind is that the company’s advertising effort online is contingent on the current algorithm that online search companies use. Any change in the search algorithm is something that can adversely affect the company’s lead generation efforts.

Still, investors are waiting for India’s homegrown, much-celebrated internet-based businesses to list so that they can get a piece of their businesses. Whether PB Fintech’s IPO sails through or not is not something that investors should be concerned about - that’s pretty much a given, considering the buzz around these listings.

It is the offline pivot by PB Fintech after it acquired an insurance broker’s licence that raises some questions. This will entail more cash and the company is not generating any. Even though Paisabazaar turned profitable at the end of FY21, Policybazaar still hasn’t. And as pointed out earlier, break-even is four years away.

The company will churn cash till then. PB Fintech is also expanding into selling insurance to corporate clients. Essentially, the company is turning into a full-fledged intermediary for financial products. PB Fintech is a business with a lot of buzz and is dominant in its online niche, but right now it’s spending a lot more money than it's making. The usual metrics for evaluating a company may have to be tossed out of the window for investors keen on subscribing to its IPO.