Policybazaar is an aggregator which sells a product which has very high margins in terms of the commission structure and it is a space which is truly getting disrupted by existing brokers, banks, distributors and new companies. How do you view the company now?
I will just break down this whole analysis into two parts. One is the business itself and second is the valuations part. They have built an incredible business. Insurance is an extremely complicated product. Nobody really understands what the IRRs are, what the payouts will be and all such financial things. Policybazaar has tried to simplify those things. They have tried to create an online platform where a lot of these things are easily available and one is not dependent on the broker or at the mercy of the large companies. So it is a very innovative platform and they are providing a good service.
When we talk about fintech businesses, we have to understand that tech and the internet is the future. Insurance is a push product not just in India but even in China, even in the United States is maybe 20 years ahead of India in evolution. So insurance needs some assistance. In India, we really do not have financial literacy and it is a push product and to push a product, the online channel is not itself adequate.
Policybazaar employs more than 6,000 people. If it is a fintech company, we do not expect such a large employee base where employee expenses are roughly Rs 500 crore, maybe slightly more than the insurance premiums that they collect. Insurance remains a people-heavy business. They have introduced a tech platform but it will remain a people heavy business. Policybazaar itself stated that they are going to open 200 branches. When an online company is saying they will need a lot of branches to sell, they are also giving us the message that insurance cannot be purely sold online. A lot of human assistance is needed and the way to profitability is very long.
Platform as a business where once you achieve a scale, the revenue will grow much faster than the costs. But here, the revenue and costs are tied very much with each other because they have to keep on selling more and more policies each year and to do that, they need to spend more and more money because the insurance commissions also are the highest in the first year and the second, third, fourth renewable commissions are extremely low.
My base assessment is that we should not think of this as a purely online or a fintech company. The company may be 75-80% offline and 20% online or maybe 70-80% is people business and 20% is tech business. I would not compare it with an Amazon or a Facebook or even Nykaa or something where the online part is much bigger.
The broking business used to be dominated by sub brokers and there used to be relationships. But now the Zerodhas and the Angels and the ICICI Securities of the world have taken it away. What are the chances that an aggregator like Policybazaar would benefit by taking the intermediary out?
Equities is a fairly simple product. You buy a stock and you pay brokerage on it. You buy a futures and option contract and you pay some amount of brokerage on it. The tech has really helped the brokerage sector because the same happens with mutual funds also.
Mutual fund is a very simple product. You decide a scheme, you do an SIP, you can increase or decrease or remove your allocation and you are going to pay them the fund allocation charges. But in insurance, the product itself is highly complicated. Policybazaar is not going to be able to change the product which LIC is selling or which a Bajaj Allianz is selling or which an HDFC Life is selling. The product itself is so complicated that there is a limit to which Policybazaar can simplify the whole process.
A huge boom in the insurance sector may be 10 years away because one has to get the ticket size to the level of a micro insurance. Today, Rs 500 SIP in a mutual fund is possible or just Rs 20,000 in your Zerodha account and you can trade in future options contracts. But the same is not true for insurance.
In ULIPs, if I do not pay more than 1 lakh of premium, I am paying such high fees that we will end up losing a lot over my 10-year journey. Policybazaar is constrained by the sector and the sector itself has to first simplify. The regulator and all the players have to make the insurance sector simpler but the world over, it is not the case.
In China, only 5% of the policies are sold online. If you look at the United States, the Mecca of the whole online boom, only 13% of the policies have been sold online. Anytime near in India, we can expect what happened to Zerodha, Upstox and Angel’s of the world that will happen to Policybazaar. But that may be a little away and till then, we have to live with losses and low profitability.
Sooner or later, every company will be subject to the same test. We can say they are new age businesses but let us not forget that ICICI Securities once upon a time was a new age business and we value it on profits and the cash flows. The same is going to happen to these companies once the euphoria around them subsides.
For Policybazaar to grow more, they will have to spend more and profitability is still far away. In terms of critical mass, India as a country will not have the great operating leverage very soon. That is why the insurance sector will not repeat what happened in the mutual funds or brokerage sector. It is still a little time away.
