Sanjeev Bikhchandani of Info Edge met Yashish Dahiya in 2008. In the conversation, Dahiya claimed that Sanjeev was paying 60% higher for his car insurance. He later presented a demo using the prototype they had built, confirming his claim. Sanjeev put in seed money. Twelve years later, Policy Bazaar is a market leader with 93% market share in the insurance tech space. The company is looking to raise ₹6017 Crores via IPO.
Considering the current euphoria around platform companies, should you subscribe to the Policybazaar IPO? This post looks at how the numbers stack up and see if it makes sense to invest.
The Offer:
- Issue size: ₹6017.5 Cr
- Offer for sale: ₹2267.5 Cr
- Fresh issue: ₹3750 Cr
- Price band: ₹940 to ₹980 per share
- Retail quota: 10% of net offer
- IPO dates: Nov 1st to Nov 3rd, 2021
- Listing date: Probably on Nov 15th, 2021
The offer for sale is by Softbank, promoters & other senior management.
Policybazaar plans to use the fresh issue of ₹3750 crores for brand awareness, acquisitions & business expansion.
Policy Bazaar at a glance
The company was founded in 2008 with its HQ in Gurgaon. Policy Bazaar is the largest aggregator & marketplace for all insurance products. The company has a 93.4% market share based on the number of policies sold. 65% of all digital insurance sales happen through its platform.
The company has around 48 insurance brands & offers over 390 insurance plans on its platform. The company had transacted ₹ 4710 Cr of total premiums and ~7L Cr of the total sum assured in FY21.
Over some time, the company had expanded its offerings beyond insurance.
Paisa Bazaar
In 2011, the company had launched its digital lending platform, Paisa Bazaar. It is India’s largest marketplace for loans & personal credit products. It has tie-ups with 56 banks & NBFCs to offer products on its platform. In the last 3 years, Paisa Bazaar enabled disbursals of ₹ 5101 Cr, ₹ 6549 Cr, and ₹ 2916 Cr, respectively. Paisa Bazaar contributes 33% of overall revenues.
DocPrime
It is a platform that connects the Patients & Doctors. It facilitates online doctor appointments, lab tests, etc. Sounds like Practo? Mostly, yes. Recently the company invested $7.5Mn in Visit Health as part of their Series A funding.
QuickFixCars
It is an aggregator network of garages across the country. It provides car services, repair & maintenance, etc.
To date, Policy Bazaar has raised ~800 Mn in 10 rounds from different investors.
How Policybazaar makes money
Policy Bazaar make money from various avenues like,
- Commissions from the insurance players
- Marketing & other services to the insurers
- Lead generation & advertising income
In the last 3 years, the revenues had grown at a CAGR of 21.9% to ₹ 957 Cr as of FY21.
The company is yet to turn profitable at the EBITDA level. It is generating an EBITDA loss of ₹ 159 Cr as of FY21.
The net loss stands at ₹ 150 Cr as of FY21. Down from ₹ 346 Cr in FY19.
Before going further, we have to understand an important concept called Contribution Profit. It is calculated as revenue from operations less variable costs like employee expenses, marketing, etc.
Contribution profit = Revenue – Variable costs
Contribution profits are an important part of break-even analysis for start-ups. Increasing contribution margins is a good sign of a path to profitability.
The company was consistently reporting contribution profit in the last 3 years. It moved from 42 Cr to ₹ 353 Cr as of FY21.
Contribution margins are also expanding from 8.6% to 39.8% during the same time. This is a good sign.
Shareholding
Softbank (15.8%) & Info Edge (13.9%) are the major shareholders of Policy Bazaar.
Investments in Policybazaar are held by Info Edge directly (4.6%) and indirectly through a JV subsidiary with Temasek (14.5%) via MakeSense Technologies.
Softbank is looking to bring down its stake to 10.7%. On the other hand, Info Edge will continue as the largest shareholder without any stake sale.
The euphoria around Platform companies
In the last year, we have seen a new set of companies gaining popularity – Platform companies. Companies like IRCTC, IEX, Naukri, CDSL, etc., are the leaders of this market rally.
Platform companies differ from a traditional business like a cement factory or an auto-ancillary company because of its Scalability & Network effect. Once these companies achieve scale, the incremental cost of acquiring a new customer will be minuscule. Every rupee earned will be a free cash flow for the firm.
We had witnessed this in the US with FAANG & other tech giants. Investors are expecting the same from these new-age companies in India. Only time will tell how long this euphoria will last, but the excitement around monopoly platform companies is real for now. Policy Bazaar exactly falls in this category.
Policy Bazaar valuation
At the upper band, the company is looking at a valuation of ~44,000 Cr. The company reported a revenue of ₹ 957 Cr in FY21. The price to sales ratio is at 45 times. This is on a higher side compared to even recent tech IPOs.
Policy Bazaar has cash of 1810 Cr on its balance sheet as of FY21. Post the IPO, it will receive ₹ 3750 Cr of additional cash. In total, they will have a war chest of 5560 Cr. The company is making an EBITDA loss of ₹ 160 to 200 Cr every year. So, they will have enough cash to sustain the current growth rate.
When will Policy Bazaar turn profitable?
Not any time soon. At least, that is the sense we get going by the recent management interview.
Source: Moneycontrol
The company is profitable on a unit economics level. They spend most of the money on Ad spend & marketing (41% of the revenue). This cash burn will continue to happen. So the investors may have to wait for some more time to see the company report profits.
Should you subscribe?
Skip the IPO.
The company is in the growth phase in an under-penetrated market. However, the valuations are stretched even by the recent IPO standards. This, coupled with no sign of profitability in the near term, will disinterest the investors.
Long-term investors do not need to jump on the IPO. Alternatives in the tech space offer similar growth opportunities. As for Polizybazaar, wait for execution towards achieving profitability before buying.
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