PB Fintech faces up to 46% earnings risk from Irdai's draft rules: Analysts

PB Fintech, the parent of Policybazaar, faces earnings risk due to regulator Irdai's proposed changes to the insurance distribution framework, said brokerages.

 

According to a Jefferies report, PB Fintech may see a 10 per cent drop in new business commission rates, leading to 10-12 per cent fall in earnings. 

 

Analysts at Motilal Oswal Financial Services echoed similar views, highlighting regulatory tightening of commissions as a key risk to the company’s future revenue visibility.

 

Meanwhile, on the bourses, PB Fintech shares rebounded 4 per cent in early trade on Friday to make a high of ₹1,261.70, a day after diving 36 per cent. 

PB Fintech core online insurance business

 

 

Notably, PB Fintech hosted a call to discuss the implications of the Irdai's proposal and indicated that the changes, if implemented, could result in a potential 30 per cent hit to FY28 core online insurance revenue.  

READ MORE: PB Fintech may explore new business options after Irdai commission cuts

 

According to the company, General insurance (GI) economics could fall sharply as it sees the Net Premium Valuation (NPV) of GI business dropping to 35-40 per cent of current levels, implying a 60–65 per cent cut. 

 

As per Motilal Oswal's assessment, if FY28 core online insurance revenue estimates are lowered by 30 per cent, without factoring in any adjustments to expenses or additional revenue streams highlighted by the company, the earnings estimates would decline by 46 per cent. On these earnings, the PB Fintech stock would trade at 73x. 

 

"Assuming the company is able to cut down its employee and advertisement costs by 20 per cent compared to current assumptions, the earnings cut would be about 30 per cent, and the stock would trade at 57x," the brokerage said. 

READ MORE: Irdai commission caps may weigh on insurance fee income of banks, NBFCs

 

Until the final regulations are announced, Motilal Oswal believes PB Fintech stock will continue to underperform. It has reiterated a 'Neutral' rating with a revised target price of ₹1,150.

 

Jefferies noted that Irdai's proposed changes could have a "material adverse impact on PB Fintech's near-term earnings" and kept earnings unchanged, but cut Policybazaar's valuation multiple by 30 per cent to 18x FY30e Ebitda due to uncertainty. It said that the proposed commission cuts could have a larger impact on PB Fintech’s non-life insurance business, with the company indicating that NPV could fall to 33-40 per cent of the current level. Life insurance NPV, however, could remain broadly similar due to higher renewal commissions in term insurance. To mitigate the impact, PB Fintech plans to focus on cost optimisation, including potentially slowing hiring and reducing marketing expenses. The company is also exploring new opportunities, including MGA, credit-life products, setting up own insurers, and monetise services such as PB Wheels and PB Garages. 

The brokerage has, however, retained its 'Buy' rating on PB FIntech stock, but trimmed the target price to ₹1,540 from ₹2,050.  READ MORE: Irdai's distribution reforms may disrupt insurance growth in near term

  

Disclaimer: Views and outlook shared belong to the respective brokerages/analysts and are not endorsed by Business Standard. Readers' discretion is advised.