PB Fintech Target Price: Bernstein has cut its target price on PB Fintech by 53% to Rs 1,085 from Rs 2,310, while retaining its ‘Outperform' rating, as the brokerage revises its earnings estimates following what it calls a “harsher than expected” commission cut proposal.
In its updated report titled “PB Fin: Max pain - Business model changes needed; Updating our forecasts and target price”, Bernstein said the reduced take-rates in the general insurance business cannot cover PB Fintech's current costs.
The brokerage expects the company to either scale back its general insurance business or find alternative models to capture the value lost from lower revenues in the health segment.
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Bernstein said mitigation strategies could help recoup some of the lost value, but these are difficult to quantify at this stage and have not been factored into its forecasts.
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The brokerage also expects the PoSP business to scale down, while warning that the next 18 months will be “do-or-die” with a wide range of outcomes possible.
PB Fintech Business Model Needs To Change
Bernstein said PB Fintech's business model needs to change under the proposed commission caps.
The brokerage said it does not know whether the regulator will modify the proposed caps or what mitigation strategy PB Fintech will eventually implement. For now, Bernstein has assumed “max pain”, with no regulatory rollback and no upside from potential mitigation strategies.
The brokerage sees an arduous path to its revised FY30 net income forecast of Rs 20 billion, compared with its earlier estimate of Rs 32 billion before the regulatory impact.
Bernstein expects the next few quarters to involve sharp cost control and execution of the planned mitigation strategies.
Bernstein Cuts PB Fintech Profit Forecasts
Bernstein has eliminated PoSP revenues and direct costs from its estimates, describing the business as low-margin and now unviable.
The brokerage is also factoring in sharp cost cuts in the core business in FY28, including a reduction in direct costs and flat indirect costs.
Despite these measures, Bernstein expects a 35% year-on-year contraction in revenue and a 9% contraction in profits in FY28.
This means its FY28 revenue and profit estimates are now around 50% and 31% lower, respectively, than its previous forecasts.
For FY29 and FY30, Bernstein expects revenue growth to return to around 30%, although from a weaker base. Profit growth is expected to be slightly faster than revenue growth.
The brokerage said its profit estimates are now around 30-40% lower than its previous estimates.
Why Bernstein Calls Next 18 Months ‘Do-Or-Die'
Despite the near-term pressure, Bernstein said it continues to like what remains of PB Fintech's business from a growth and value-creation perspective beyond FY28.
However, the brokerage expects a difficult transition as PB Fintech adjusts to lower take-rates, scales down its PoSP business and implements mitigation strategies.
Bernstein therefore described the next 18 months as “do-or-die”, with a wide range of possible outcomes.
PB Fintech Valuation: Bernstein Moves To 25x FY30 Profits
Bernstein said valuing PB Fintech has become difficult given the limited visibility on its future business model and the effectiveness of potential mitigation strategies.
Under a worst-case scenario, the brokerage has taken FY30 profits without assuming regulatory relief or any mitigation measures and applied a valuation multiple of around 25x.
Bernstein has also moved away from its previous two-stage DCF valuation methodology. Its previous valuation and target price implied a roughly 34x FY30 multiple on its earlier FY30 earnings forecast.
The brokerage said some regulatory relief could come through, while the option value of potential mitigation measures could influence the stock's valuation beyond the FY30 earnings multiple. However, these factors have not been included in its current forecasts.
Bernstein Flags Dark-Patterns Risk
Bernstein also identified the proposal relating to dark patterns as a material issue for PB Fintech.
If PB Fintech is not allowed to collect contact details as envisaged in the proposal, Bernstein believes future growth could take a hit.
The brokerage said this risk is not currently included in its forecasts or reflected in the price.
It also flagged the possibility that this or other aspects could lead to litigation with the regulator, creating a risk to sentiment around the stock.
Other risks include the implementation of capital-heavy mitigation strategies and attrition of key personnel in response to the crisis.
PB Fintech Target Price: Rs 1,085 Vs Rs 2,310
Bernstein has retained its ‘Outperform' rating on PB Fintech while cutting its target price to Rs 1,085 from Rs 2,310, a reduction of 53.03%.
The brokerage said it sees a path to Rs 20 billion in FY30 net income, assuming no regulatory rollback and sharp cost cuts.
However, the potential upside from PB Fintech's response to the regulatory changes has not been included in its forecasts, as Bernstein said mitigation strategies will take time to execute and assess.
The brokerage values PB Fintech at around 25x FY30 EPS, citing its high-growth and expanding-margin profile beyond the difficult FY28 period.
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