Mumbai: Bernstein has sharply cut its target price for PB Fintech Ltd., the parent company of Policybazaar and Paisabazaar, to ₹1,085 from ₹2,310, a reduction of about 53%, following its reassessment of the impact of the Insurance Regulatory and Development Authority of India’s (IRDAI) proposed changes to insurance distribution commissions.
The brokerage has retained its ‘Outperform’ rating on the stock but said the next 18 months could be a critical period for PB Fintech as the company adjusts its business model to lower commission rates and evaluates ways to offset the potential revenue impact.
The revised target comes just days after Bernstein had retained its ₹2,310 target for PB Fintech. The stock has since fallen sharply following the IRDAI proposal, with the shares declining about 43% over four consecutive sessions, according to market reports.
Bernstein assumes ‘max pain’ scenario
In its latest report, titled “PB Fin: Max pain – Business model changes needed; Updating our forecasts and target price”, Bernstein said the proposed commission caps were harsher than it had previously expected.
The brokerage said there is currently uncertainty over whether IRDAI will modify the proposed caps or whether PB Fintech will successfully implement measures to mitigate their impact.
For its revised estimates, Bernstein has therefore assumed a “max pain” scenario, with no regulatory rollback and no financial benefit from potential mitigation strategies.
Bernstein said the reduced take-rates in general insurance could make PB Fintech’s existing cost structure difficult to sustain. It expects the company may need to scale back parts of its general insurance business or develop alternative models to capture value that could be lost from lower commissions in the health insurance segment.
FY28 revenue and profit estimates cut
Bernstein has significantly reduced its earnings forecasts for PB Fintech following its assessment of the proposed regulatory changes.
The brokerage now expects revenue to decline 35% year-on-year in FY28, while profit could fall 9%. Its revised FY28 revenue estimate is about 50% lower than its previous forecast, while the profit estimate is around 31% lower.
For FY29 and FY30, Bernstein expects revenue growth to recover to around 30% annually, although the growth would come from a lower base. Profit growth is expected to be slightly faster than revenue growth as the business adjusts its cost structure.
Even after the revisions, Bernstein sees a potential path for PB Fintech to reach around ₹20 billion in net income by FY30 under its assumptions. That compares with its earlier FY30 profit estimate of ₹32 billion.
The revised forecast therefore represents a substantial reduction in the brokerage’s expectations for the company’s earnings trajectory.
PoSP business faces pressure
Another major change in Bernstein’s model is its treatment of PB Fintech’s point-of-sale person (PoSP) business.
The brokerage has eliminated PoSP revenue and direct costs from its forecasts, describing the business as low-margin and potentially unviable under the proposed regulatory framework.
Bernstein expects the PoSP business to scale down as the company responds to lower commissions.
At the same time, the brokerage expects PB Fintech to implement significant cost reductions in its core operations during FY28. Its assumptions include lower direct costs while indirect costs remain broadly flat.
The scale and speed of these cost reductions will be important to the company’s ability to protect profitability during the transition.
Why the next 18 months matter
Bernstein described the coming 18 months as “do-or-die”, reflecting the wide range of possible outcomes it sees for PB Fintech as the regulatory framework evolves.
The brokerage said it continues to see attractive growth and value-creation opportunities in the remaining business beyond FY28. However, the company first needs to navigate the transition to lower take-rates, restructure its PoSP operations and implement mitigation strategies.
The eventual outcome could depend on several factors, including the final form of IRDAI’s regulations, the company’s ability to reduce costs and whether it can develop new ways of monetising its customer base.
Importantly, Bernstein said the potential benefits of mitigation strategies have not been included in its current forecasts because their impact is difficult to quantify at this stage.
Target price valuation changes
Bernstein has also changed the way it values PB Fintech.
The brokerage has moved away from its earlier two-stage discounted cash flow methodology because of limited visibility into the company’s future business model and the effectiveness of potential mitigation measures.
Instead, it has valued the company at about 25 times its estimated FY30 profits under the revised scenario.
The earlier valuation had implied a multiple of around 34 times FY30 earnings based on the previous profit forecast.
Bernstein noted that potential regulatory relief could improve the outlook. The brokerage also sees an option value from mitigation strategies that could influence the company’s valuation beyond the FY30 earnings multiple.
However, neither factor has been incorporated into its current target price.
IRDAI proposal is central to the concern
The latest Bernstein report follows IRDAI’s proposal to overhaul the economics of insurance distribution.
The proposed changes include revisions to commission structures and limits on payouts to insurance intermediaries. The regulator has said the broader reforms are aimed at improving customer protection and addressing concerns around insurance distribution and mis-selling.
The proposals have already affected shares of several companies linked to insurance distribution. PB Fintech recorded a sharp decline after the announcement, while other insurance-related stocks and financial companies also came under pressure. Reuters reported that PB Fintech lost more than $3 billion in market value during the initial sell-off.
The proposals remain subject to the regulatory process, with stakeholders given an opportunity to submit feedback. Consequently, the final rules could differ from the current consultation proposals.
Dark-pattern rules add another risk
Bernstein has also flagged proposed restrictions relating to so-called dark patterns as a potential issue for PB Fintech.
The brokerage said that if the company is unable to collect customer contact details in the manner contemplated under the proposal, its future customer acquisition and growth could be affected.
Bernstein said this risk has not been incorporated into its forecasts or reflected in the current valuation.
It also identified the possibility of regulatory disputes or litigation as another risk that could affect investor sentiment.
Other risks highlighted by the brokerage include the cost of implementing mitigation strategies and the possibility of employee attrition during the business transition.
PB Fintech’s longer-term growth remains in focus
Despite the sharp reduction in its target price, Bernstein has retained its ‘Outperform’ rating.
The brokerage’s assessment indicates that its concerns are concentrated largely around the transition period and the potential impact of the proposed commission structure on near-term earnings.
It continues to see growth potential in PB Fintech’s underlying business beyond FY28, particularly if the company successfully adapts its business model and returns to stronger revenue growth.
However, the final impact will depend on the regulations ultimately notified by IRDAI and the company’s response to them.
For investors tracking PB Fintech, the key factors over the coming quarters will include the final commission framework, the company’s cost-reduction measures, the future of its PoSP business, customer acquisition trends and the development of alternative revenue streams.