Morgan Stanley Cuts Policybazaar's Revenue Forecasts As Growth Slows

Morgan Stanley has revised its forecasts for PB Fintech Ltd., operator of Policybazaar, owing to slower growth in core insurance premiums, led by weaker growth in retail protection and motor insurance segments.

"We have cut our headline revenue forecasts by 8–28% for fiscal 2023–2027," said the brokerage in its investor note dated Oct. 11. "Our core revenue forecasts fall 4-27% for fiscals 2023-2027."

The brokerage, while expecting cost-control measures by the insurance company, kept its headline adjusted Ebitda margin forecast for fiscal 2027 unchanged at about 26%. The absolute adjusted Ebitda forecast of Rs 1,510 crore is, however, down 25%, the note stated.

The brokerage also lowered valuation multiples to factor in weaker profitability and investor sentiment.

Morgan Stanley cut PB Fintech's price target from 840 to Rs 620 apiece, implying a 29% upside from the current share price, but maintained "overweight" ratings on the stock, given its structural profit pool and franchise strength. 

“Although headline insurance premiums have been strong (boosted by new initiatives such as POSP), growth in core insurance premiums has been slowing,” the note stated.

The brokerage pointed out that industry premium growth in retail protection and the company’s growth in motor insurance segments have been under pressure.

whereas the savings business has been enjoying strong growth aided by the offline channel, said the brokerage.

PB Fintech's large structural profit pool, franchise strength, and trailing underperformance along with declines in valuations, keep the brokerage constructive from a one-year perspective.

But in the near term, PB Fintech, which entered the markets through its initial public offering last year, could see some pressure on the stock as the one-year IPO lock-up for pre-IPO investors expires in mid-November, Morgan Stanley said.

Morgan Stanley expects the operator of digital insurance platform Policybazaar to clock an insurance premium CAGR of 33% through fiscal 2022 to 2027, as compared with an assumption of 47% prior owing to slowing core insurance premiums. "This has been driven by weakness in industry premium growth in key segments such as retail protection, and competitive intensity in segments such as motor."

The brokerage expects a 50% annualised growth for premiums from new business initiatives, a decline from 66% previously, while disbursements could grow 42% over fiscal 2022- 2027. It earlier predicted disbursements to grow 48%.

Despite the cuts, the brokerage said, annualised revenue growth across core and new business initiatives should remain strong at 27% and 53%, respectively, over the financial year 2022 through 2027. "We see this resulting in healthy revenue growth (33% CAGR) over the medium term."

The adjusted Ebitda margin will most likely improve from -20.7% in fiscal 2022 to 4.5% in fiscal 2024 and 25.8% in fiscal 2027, the brokerage predicted.

Separately, Kotak Institutional Equities kept a 'buy' call on the stock, with a fair value of Rs 730, giving a potential upside of 56%.

Shares of PB Fintech rose 1% before reversing gains to trade with 1% losses. The trading volume is similar to 30-day average.

Of the 10 analysts tracking the company, eight maintain a 'buy' and two suggest a 'hold', according to Bloomberg data. The 12-month consensus price target implies an upside of 61%.