Online insurance aggregator PolicyBazaar launched its initial public offering (IPO) on Monday, November 1, while payments app Paytm opens its next week, on November 8. The two financial technology (fintech) companies have grown into unicorns with successive rounds of institutional investments, and both are leaders in their respective fields.
These IPOs come in just as beauty products etailer Nykaa is closing its maiden issue, in a year that will be remembered for the listing of e-commerce giants.
So, if you’re in the habit of making some investments around Diwali, should you be buying shares in PolicyBazaar and Paytm? A glance at their operations, valuation and medium- and long-term prospects may help you make an informed decision.
PolicyBazaar: Premium valuation
PB Fintech, the parent firm of PolicyBazaar, has launched an IPO to raise ₹5,625 crore. It is considered the leading online platform in India for insurance products, though the space is hotting up with rivals such as BankBazaar, Coverfox and Paytm Insurance upping the game. Many of the insurance players are also bolstering their online presence, edging out aggregators from their sales plan. Already, HDFC Ergo and ICICI Lombard have opted out of the PolicyBazaar platform.
Like several of its unicorn peers, PolicyBazaar is a loss-making entity. At the upper end of its IPO price band of ₹940-980 a share, PolicyBazaar is seeking a market capitalisation (m-cap) of ₹44,041 crore post listing. This translates into a 44x price-to-sales (based on FY22 annualised sales) ratio, which conservative investors would call untenable.
The value of the company lies in its long-term potential. Insurance penetration is very low in India compared to more advanced economies. The online insurance space is still nascent. This could present a huge growth opportunity for PolicyBazaar. While the increase in number of rivals could pose a threat, it could also considerably widen the market.
The COVID outbreak is already estimated to have boosted awareness on the need for health and life insurance. PolicyBazaar could capitalise on these trends and use its early bird advantage in the sphere to grow its market share.
Paytm: Heavy outflow
One97 Communications, which operates payments portal Paytm, is looking to raise ₹18,300 crore from its IPO, which would make it India’s largest maiden offer. The price band has been fixed at ₹2,080-2,150 per share.
At present, Paytm is the nation’s largest payments platform for consumers and merchants. It has onboarded nearly 34 crore registered consumers and about 3 crore registered merchants.
Like PolicyBazaar and dozens of other apps, Paytm has been posting losses year on year. While it does have a transaction and convenience fee-based revenue model, its marketing and promotion spends are high. “We expect to continue to incur net losses for the foreseeable future,” One97 said in its IPO draft red herring prospectus (DRHP).
Over the recent past, demonetisation, and the government’s push for digital payments, have given Paytm an edge over its younger rivals. Over the long term, it can improve its bottomline if its adds a substantial number of new merchants, retains them, and increases its gross merchandise value (GMV), a key metric in e-commerce.