At a time when stocks of most life insurance players are far off from their highs, domestic brokerage firm JM Financial has upgraded the stock of online insurance platform provider PB Fintech to a 'buy' from a 'hold'.
The brokerage firm, however, has reduced the target price of the stock to ₹980 from the previous target price of ₹1,030. Still the current target price is 38 percent higher than the March 10 closing of the stock at ₹710.25 on BSE.
PB Fintech is India’s largest online platform for insurance and lending products. Policybazaar and Paisabazaar are the two popular units of the company.
Shares of key insurance providers such as ICICI Prudential Life Insurance Company (down 37 percent), HDFC Life Insurance Company (down 33 percent), Max Financial Services (down 32 percent) and SBI Life Insurance Company (down 19 percent), have fallen up to 37 percent from their respective 52-week highs. On the other hand, equity benchmark Sensex is 11 percent off its record high.
As the brokerage firm Motilal Oswal observes, large private life insurance players have witnessed a moderation in growth over Jan-Feb 2022, after healthy traction was visible in the previous months.
Motilal Oswal expects the growth trend to remain modest, given pricing pressure on protection business, while Q4FY22 being a seasonally strong quarter will support the overall momentum with a continued focus on Non-PAR/Annuity. The brokerage firm prefers SBI Life and HDFC Life among the private life insurance players.
Observing the trend, investors may feel perplexed as to why an online insurance platform should get an upgrade when the insurance providers are struggling with moderate growth.
Investment rationale by JM Financial
One reason for the buy call is the sharp correction in the stock which has made its valuation attractive. Shares of PB Fintech is down 52 percent from its high of ₹1,470 despite the company reporting 44 percent year-on-year (YoY) nine-month FY22 revenue growth and announcing a partnership with Life Insurance Corporation of India (LIC).
"We understand this has largely been due to market apprehensions with regards to the realistically available addressable market, competitive intensity and potential platform benefits (or lack thereof). We were already appreciative of the business model and the recent stock price correction also makes the risk-reward extremely favourable," JM Financial said in a report.
"We continue to believe that Policybazaar will remain the dominant insurance distribution platform in India and upgrade PB Fintech to ‘buy’ rating with a March 2023 target price of ₹980, using discounted cash flow (DCF) valuation methodology as an intrinsic valuation approach seems more plausible in light of the volatile markets," the brokerage said.
A DCF model is a financial model in which the expected future cash flow of a company is considered to decide the value of the stock.
JM Financial pointed out Policybazaar’s total and new insurance premium, excluding PoSP (point of sales person), has grown 38 percent and 34 percent YoY, respectively, in nine months of FY22 despite a sluggish industry environment with general insurance premiums growing 11% and life insurance new business premium (NBP) growing 7 percent during the same period.
Policybazaar’s growth rates at 2-4 times of the base industry already imply that the company is gaining enhanced market share of the overall insurance distribution in India, JM Financial said.
Across its two platforms, Policybazaar and Paisabazaar, PB Fintech has the potential to engage with customers 4-5 times annually. A customer can buy or renew auto insurance, health insurance, life insurance along with travel insurance while also simultaneously checking their credit scores, applying for personal, auto, or home loans as well becoming lead for credit cards. Hence, while touch-points for PB Fintech might not be as frequent as their peers but the company does have the potential to attract users to the platform multiple times in a year, the brokerage added.
Besides, life and health insurance have renewal rates upwards of 60 percent, enabling very high retention metrics for the company and also driving margin expansion.
JM Financial believes the Indian insurance industry has strong secular tailwinds driving sustained long-term growth and Policybazaar will continue dominating insurance distribution in India across offline and online. However, continued risk-off moves in tech stocks and a sharper rise in competitive intensity from insurers’ direct channel and fintech players are the key risks for the company.
Technicals of the stock
As far as technical factors are concerned, the stock is making higher bottoms on daily charts after a vertical sell-off since the listing. "Double bottom of ₹632 on weekly charts confirms an upmove to ₹830-850 levels. Maintain a stop loss of ₹680," said Vikas Jain, Senior Research Analyst at Reliance Securities.
Prashanth Tapse, Vice President (Research), Mehta Equities, highlighted that among the new-age tech businesses, he likes PB Fintech for its efficient business model and with low penetration levels in the insurance space, the company has bright prospects going forward.
"Technically, the stock is in extremely oversold conditions. From here, the downside appears to be limited as its biggest support is seen at ₹618-640. With risk on markets mood, we recommend accumulating PB Fintech at the current levels amidst positive divergence on the short term charts with targets at ₹821 and then aggressive targets at ₹900-950," said Tapse.
Rupak De, Senior Technical Analyst at LKP Securities underscored the stock has been falling with a lower top and lower bottom formation, indicating a prevalent bearish trend. However, recently the price has given a consolidation breakout on the daily chart indicating an initial sign of a bullish reversal.
"The momentum oscillator RSI (14) is a bullish crossover; moreover, a positive divergence is visible on the daily RSI (14). The short-term trend looks bullish as it has moved above the recent consolidation. On the higher end, it may move towards the 50-EMA (exponential moving average) that acted as resistance time and again. Therefore, the initial resistance is visible at ₹820. Above ₹820, the stock price may move up sharply. On the lower end, support is visible at ₹660, below which the downtrend may resume," De said.
Tirthankar Das, Head of Technical Research at Ashika Stock Broking said the medium to long term outlook of the stock continues to remain negative with consecutive lower low formation from November 2021 onward. "A decisive breakout above the supply line adjoining the high of November 2021-February 2022 i.e. above ₹800 would change the trend from negative to positive," said Das
Vijay Dhanotiya, Lead Technical Research at CapitalVia Global Research said the stock is near its oversold zone but there is still no indication of a big positive movement in the stock. "We do not recommend investing in this stock in these turbulent times," said Dhanotiya.
(The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.)