PB Fintech after 36% rout: Analysts see more pain ahead

Reports coming in for today mention that Shares of PB Fintech, the parent firm of Policybazaar, plunged 36 percent on Thursday, September 24, wiping out more than Rs 31,000 crore from its market capitalisation, after IRDAI proposed changes to insurance distribution commissions and expense limits.

The sharp selloff has put the spotlight on the sustainability of PB Fintech’s recently profitable business model, with market watchers warning that a steep reduction in insurance commissions could hit topline and earnings at a time when the firm has only recently turned profitable. The insurance aggregator had managed to break even in Q4FY24.

Aishvarya Dadheech, CIO at Fident Asset Management, stated the proposed framework could have a significant impact on PB Fintech because of the firm’s dependence on commission income.

According to Dadheech, around 50-55 percent of PB Fintech’s business is commission-linked. If the proposed changes result in a sharp reduction in commission yields, he estimates that the firm’s topline could slide by nearly 60 percent.

The bigger concern, according to him, is that expenses may not decline at the same pace as topline. PB Fintech has turned profitable only over the last one-two years as its current business model has scaled up, and a sharp compression in topline could as a result put that profitability under pressure.

Jefferies has additionally flagged a meaningful earnings risk for PB Fintech and Turtlemint from the proposed changes.

The brokerage estimates that a 10 percent trimmed in new business commission rates could translate into a 10-12 percent slide in earnings. This makes the commission structure a key variable for market participants to track as the draft rules move through the consultation process.

PB Fintech: Technical setup turns weaker

The sharp decline has additionally broken the stock’s recent trading range, according to Jay Vora, Senior Technical Market observer at Mirae Asset Sharekhan.

Vora stated PB Fintech had been trading in a broad Rs 1,700-1,800 range before Thursday’s selloff. With the stock closing at Rs 1,210 after the 36 percent decline, he sees the possibility of further downside towards Rs 1,100.

Vora stated he would not want to venture into the stock at current marks, adding that even a minor bounce could be used to exit as the regulatory overhang is likely to keep investor caution elevated until there is greater clarity on the final rules. What has IRDAI proposed?

The immediate trigger for the selloff was IRDAI’s consultation paper proposing tighter rules around insurance distribution.

The regulator has proposed bringing back product-specific commission caps across life, health and motor insurance. These caps had been removed in 2023, allowing insurers and distributors greater flexibility in determining commission payouts.

The new proposal would additionally tighten Expense of Management, or EoM, limits for insurers. The broad objective is to place greater limits on how much insurers can spend on commissions and other distribution-related expenses.

That stated, the proposed changes are still at the consultation stage. IRDAI has sought feedback from stakeholders before finalising the regulations, which means the eventual framework could differ from the current draft.