Decoding PolicyBazaar’s DRHP fine print

InfoEdge-backed online insurance aggregator and brokerage platform PolicyBazaar has filed a Draft Red Herring Prospectus or DRHP with SEBI for its upcoming listing and IPO earlier this week. PB Fintech Limited, as the parent firm is actually registered, has filed to raise an aggregate Rs 6,017.5 crore in this offer which includes a fresh issue of shares worth Rs 3,750 crore and an offer for sale of shares worth Rs 2,267.5 crore by existing shareholders of the company.

As per the DRHP, Softbank Vision Fund will be the largest beneficiary of this liquidation, offering shares worth Rs 1,875 crore in the public issue. Other selling shareholders include Founders United Trust which is selling shares worth Rs 27.5 crore, Shikha Dahiya at Rs 12.5 crore, Rajendra Kuhar at Rs 7.5 crore and the founders Yashish Dahiya and Alok Bansal who are offloading shares worth Rs 250 crore and Rs 95 crore respectively.

The company might raise upto Rs 750 crore via private placement right before the listing and such amount shall be deducted from the aggregate offer amount of Rs 6,017.5 crore.

The DRHP further details the avenues where PolicyBazaar will invest the net proceeds of the issue, with as much as 40% or Rs 1,500 crore to be used for marketing initiatives over the next three fiscal years.

Apart from marketing, the company will invest upto Rs 375 crore in developing a strong offline presence across India. It currently has 15 physical offices and aims to have 200 physical retail outlets by the end of FY24.

Expansion overseas is also on the agenda. PolicyBazaar presently has a presence in the Middle East region with its subsidiary PB Fintech FZ – LLC, Dubai. The company plans to scale up its operations and brand its presence in Dubai and in the broader GCC region, by investing as much as Rs 375 crore to develop an international presence. 

Importantly, the company will also invest Rs 600 crore toward inorganic growth initiatives including strategic investments and acquisitions of other companies.

PolicyBazaar’s FY21 numbers

PB Fintech Limited has also revealed its financial results along with the DRHP, highlighting the developments and efforts made by the management to bring down cash outflows and losses.

The company which controls both PolicyBazaar and PaisaBazaar platforms recorded a 15% increase in its revenue from operations which grew to Rs 886.7 crore in FY21 from Rs 771.3 crore earned during FY20. 

While its revenue from the insurance aggregation vertical increased due to higher commissions and outsourcing services fees earned from its insurer partners, the revenue from PaisaBazaar during the same period suffered primarily due to the impact of the pandemic. Loan disbursals sold by its lending partners on the PaisaBazaar platform decreased to Rs 2,916.8 crore in FY21 from loans of Rs 6,549.6 crore disbursed during FY20.

The company generates around 33.8% of its revenues through the fulfilment of outsourced services for its insurance and lending partners and its largest contributing revenue segment.

These collections improved by 16.7% to Rs 299.4 crore during FY21. The second-largest segment was the insurance commission earned from telemarketing which accounts for 29.2% of the revenues. This segment grew by 21.4% to Rs 259.13 crore in FY21.

Earnings from online marketing & sale of leads grew by 99% to Rs 199.04 crore and commission earned on the sale of financial products increased by 60.1% to Rs 57.83 crore during FY21.

Moving over to the expenses sheet, we see that employee benefit expenses are the largest cost centre for the company, accounting for 50.4% of the annual costs incurred. The company has 7,310 full-time employees and these staff-related costs grew by 6.4% to Rs 554.04 crore in FY21.

Advertising and promotional cost is the second largest expense, making up 33.5% of the total costs incurred by PB Fintech. The company curtailed these promotional spends in view of the covid-19 pandemic and reduced commercial activity, bringing these expenses down by 17.45% to Rs 367.8 crore in FY21.  Other operating expenditures which includes technology and payment gateway expenses remained somewhat stable at Rs 124.5 crore during FY21.

The company spent Rs 957.4 crore in total during FY21, 12% more as compared to Rs 855.6 crore spent during FY20. On a unit level, PB Fintech spent Rs 1.08 to earn a single rupee of operating revenue in FY21.

While the aggregate costs went up, the management brought down its annual losses by a whopping 51% to Rs 150.2 crore in FY21 from Rs 304 crore during FY20.

EBITDA margins have improved from -37.4% in Fy20 to -16.7% in FY21.

Earlier this year PB Fintech’s subsidiary PolicyBazaar Insurance Brokers Pvt Ltd had managed to register as a direct insurance broker (both life and general) under the Insurance Brokers Regulations in June 2021 which cemented PB’s position as the leading online insurance aggregator and broker in India.

PolicyBazaar’s litigation woes

As per Frost & Sullivan, PolicyBazaar was India’s largest digital insurance marketplace with a 93.4% market share based on the number of policies sold in FY20. During the same fiscal, 65.3% of all digital insurance sales in India by volume was transacted through PolicyBazaar, making it an interesting proposition for investors. But the risk factors mentioned in the  DRHP deserve attention.

The Insurance Regulatory and Development Authority of India(IRDAI) had carried out an inspection of books of accounts and records of PolicyBazaar and issued show-cause notices based on its findings. The regulatory authority had also slapped a Rs 24 lakh penalty on the insurance broker where the proceedings are ongoing. Further, the risk factors segment of the DRHP states that the company and its directors are facing 111 cases including 6 involving criminal proceedings. The total quantifiable amount involved in these outstanding litigations is around Rs 318 crore.

Importantly, around 38% of the offer amount i.e Rs 2,267.5 crore will be utilised to give an exit to existing shareholders including founders Dahiya and Bansal. While Dahiya had already offloaded shares worth Rs 42.2 crore in a secondary transaction right before the IPO filings, he along with his wife Shikha will receive Rs 262.5 crore from the OFS. On the other hand, Alok Bansal will receive Rs 95 crore from the OFS after collecting Rs 6.3 crore in the secondary deals.