Shares of Policybazaar-parent PB Fintech recorded a historic 36% plunge in a single session, wiping off around Rs 31,430 crore from its market value following IRDAI’s proposed overhaul of the insurance sector. However, Jefferies still held its ‘Buy’ call on the stock while flagging a possible material adverse impact on the company’s near-term earnings.
PB Fintech shares breached multiple circuit limits on Thursday to crash 36% to a 52-week low, recording the worst single-day plunge in its history. This came after the Insurance Regulatory and Development Authority of India (IRDAI) proposed a major overhaul of the way insurers pay commissions to distributors, with limits linked to the type of product, distribution channel, policy size, and the effort required to sell.
Also read | PB Fintech shares crash 36%, bloodbath wipes off Rs 31,426 cr from m-cap after IRDAI’s reform plans
Following the sharp plunge in share price and investor worries, PB Fintech hosted an analyst call to address concerns. Jefferies noted that the company’s management highlighted that the commission cuts will result in non-life net present value (NPV) or the current value of future stream of payments falling to 33-40% of original NPV. The same for life insurance, meanwhile, is expected to be similar.
PB Fintech is looking at slowing hiring and marketing to mitigate the impact, Jefferies noted, adding that the company’s focus now remains on preserving cash and exploring new opportunities such as managing general agent (MGA), which is a special type of insurance agent to act as a middleman between standard insurance companies and the public or local brokers.
How IRDAI’s proposed changes can impact PB Fintech?
IRDAI’s consultation paper on insurance distribution regulations proposed sweeping changes. Key changes with respect to distributors include commission caps based on channels proposed with lower limits for banks or brokers as compared to agents, reduction in new business commissions for health and term insurance by at least half and to a third in new motor OD and lower renewal commissions in health insurance (50-67% lower) and higher in term insurance (2% increasing to 7.5%).
There were questions on whether the new regulations will be applicable on a prospective or retrospective basis, Jefferies said, adding that while PB Fintech is seeking clarity from IRDAI on this, it does not expect insurers to renege existing contracts. “We note insurers had passed on the loss of ITC to distributors even on existing contracts. Niva indicated on a later call that the new commission regulations will apply retrospectively,” it said.
What new opportunities PB Fintech is looking at
Jefferies noted that PB Fintech’s management is exploring new opportunities like MGA. The new Insurance Act enlists MGA as an intermediary. PB Fintech is already providing insurers with fresh growth and limiting loss ratios in health insurance, similar to MGAs. However, MGAs do bear underwriting risks, the international brokerage noted.
It added that the insurance distributor is also looking at new products like credit life. The company also indicated the probability of setting up an insurer has increased. It could also look at monetizing services such as PB Wheels, PB Garages and more.
What lies ahead for PB Fintech shares?
IRDAI's proposed regulations could have a material adverse impact on PB Fintech's near-term earnings should it be implemented, Jefferies warned. However, it noted that this is a consultation paper which might undergo changes post collection of feedback.
The international brokerage kept PB Fintech’s earnings estimates unchanged, but cut Policybazaar's valuation multiple by 30% due to uncertainty. It slashed its target price to Rs 1,540 apiece from Rs 2,050 apiece, with the latest target price implying around 28% upside potential from the stock’s previous closing price.
Also read | PB Fintech forced to rethink business plan as India insurance commissions cap comes as a major shocker
Disclaimer: This article has been written by Debaroti Adhikary, who is not a SEBI-registered Research Analyst or an Investment Adviser. Debaroti Adhikary and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here.
