Yash Portfolio Feedback

Added Policybazaar (PB Fintech) in the last couple of weeks. The core insurance platform is superb, and has dominant share of the industry’s digital premiums (more than all the insurers own website channel combined). The website attracts 3x-5x more traffic than most insurers own websites and as much traffic as LICs. I believe it has become a strong brand in the insurance space, and is now top of mind in the consumer insurance buying journey. This brand strength should continue to grow over time as the company continues to spend increasing amounts on brand and customer acquisition.

PB-Fintech has the potential to be a structural long term compounder with the following growth triggers:

  1. Increased penetration of insurance in the country leading to double digit industry premiums growth
  2. Incrementally more of these premiums coming from digital channels (~60% of Policybazaar traffic comes from consumers below the age of 34 who will coming into their prime income earnings years over the next decade) taking share away from agency channel which is prone to mis-selling, poor experience and fraud.
  3. Potential for Policybazaar take rates to improve as they become a larger part of industry premiums

At the moment, the platform originates about 1% of total industry premiums. For health, by my calculations, Policybazaar is already accounting for >5% of industry premiums. The superiority of this channel over the agency channel is evident by the premium/salesperson number which is 10x of the agency channel.

The core platform generates a 45% contribution margin (including all acquisition costs and variable employee related costs). Below contribution are mainly corporate salaries, brand spend and ESOPs. ESOPs should come down next year and continue at a ~200-300 cr run rate over the long term. Other fixed costs are growing at ~10% per year.

Over long periods of time, as renewal revenue starts to become a bigger part of the premiums, the company’s contributions will expand. Renewal revenues have 85% contribution margin (no acquisition expense).

This is what I think numbers for the core platform can look like by FY28:
Growth of insurance premium from 7000 cr to 35000 cr
Growth of Credit Disbursement from 6500 cr to 35000 cr
Revenue from core platforms: 1200 cr to 6100 cr
Contribution: 470cr to 2750 cr (assumed no change in margins at 45%)
Fixed cost (including ESOP): 1200 cr to 1550 cr
Leading to PAT from core business of ~950-1000 cr in FY28

This is not very far from the guidance given by Yashish Dahiya of 1000 cr PAT by FY27

At 1000 cr PAT, and with 100+% ROE, company can easily be valued at 50x PE. Including Cash accrual, we could be looking at 55-60k MCap by FY28. Effectively a 3x opportunity in 5 years (25% CAGR). Plus all the optionality with the experiments the management keeps doing.

There are 3 things I am concerned about here:

  1. Market share moving to mobile app players such as Paytm, PhonePe, GooglePay over time. All in all, the biggest value that Policybazaar is providing is comparison between different insurance plans. While there is some challenge of technical integration with various insurers, this can easily move to other more convenient app based channels over time. Will only be evident over the long term given the low digital penetration.
  2. Change in commissions structure by the regulator: this is not a short term risk anymore given the IRDAI white paper last week. In any case, even if the regulator mandates lower premiums, PB should be able to mantain take rates by charging in other cost items.
  3. Bima Sugam: regulator is planning to come with its own insurance exchange. Contours of this are still to be detailed out but this could lead to a “UPI” moment for insurance.

The thinking is if any of these 3 come true, I can easily exit at a small loss; whereas if the core platform grows and becomes a dominant insurance distribution channel, the potential for long term compounding is immense.


Portfolio Review:

Screen Shot 2023-01-01 at 4.19.11 PM

A more normal return year after the frenzy of the last two years. A year that saw good decisions and bad decisions alike and was filled with lots of learnings.

Things that worked well in the year:

  • Decently high allocation in the portfolio to banks and financial services which were a good outperformer during the year
  • Avoided frothy sectors: new age technology, IT, pharma & manufacturing which were significant wealth destroyers during the year.
  • Selling decisions much improved over the previous year. Tata Communcations, HOEC, Real Estate Portfolio, Faze Three, Bajaj Finance & Saregama were all sells that helped the portfolio avoid losses/0 returns. No obviously bad sell decisions in the year except Rossell; which was a low conviction buy.
  • Incremental Capital Deployment pretty decent: The capital released from the funds released from selling were put to use in much better opportunities: Some of them were Ujjivan Financial, PSU Banking, Ganesha Ecosphere, MCX and Arman. Also increased banking weight during the year. All in all, the churning of positions contributed significantly to portfolio alpha during the year.

Big Mistakes/Learnings from the year:

  • Big losers for the year: Indiamart & Delta Corp. Took some big learnings from Indiamart (declined almost 60% during the year). 2 mistakes were made here: a) Extrapolation of temporary pandemic related benefits into the future & b) Failure to sell despite being fully aware that the stock was wildly overvalued. Learnings from Indiamart have informed sales of Saregama and more recently Raghav Productivity
  • While this year had relatively few mistakes of commission, there were plenty of mistakes of omission. Discussed a few posts above. A lot of opportunities were missed. I dont expect to not make these errors. But by journalling and keeping a thesis of not buying as well, I hope to reduce the errors of omission over time.
  • Sizing: Got a couple of sizing decisions wrong during the year; most obviously with PSU Banks where the weight was far too low. When odds are glaringly in your favour, and there are near term triggers for value unlocking; I need to be bolder and bet bigger. One similar opportunity I see in the upcoming year is Chinese stocks as a whole. Thus, I will be quickly ramping up allocation to Chinese stocks to the 10-15% range in the next 6 months.

Excited for the upcoming year though I suspect it will be a lot more volatile and difficult than the last year! The ability to invest across asset classes and geographies I suspect will be very important for the upcoming year.


Quite a few changes since the last post. 2 new entrants to the portfolio

  1. Added Zomato with a 3% weight:
    I view Zomato as a long-term compounder. The business has dominant moats that will prevent new entrants from coming:
  2. Large benefit of scale: as scale increases; density of network increases which reduces order fulfillment costs (more deliveries per hour) and improves customer experience (think about how long it used to take Swiggy/Zomato to deliver 4 years ago vs today).
  3. 3-sided local network effect
    A potential new entrant would have to first burn money acquiring users and then burn money fulfilling each order while it scales up; all while competing with Swiggy/Zomato’s scaled up cost structure and network density. VC’s wont fund a new player. That leaves Reliance, Amazon and Flipkart. Amazon tried and shut its service down. Flipkart wont try. Realistically only Reliance has the pockets to compete.

The growth levers are well known: User Base expansion x Frequency Increase x Order Value Increase. All 3 should happen over the long run. However, I dont think the 40-45% growth will continue; the company should easily be able to grow at 20% over the next decade.

I view Zomato more as a low-cost hyperlocal logistics player. I feel the TAM is much larger that food delivery; the company has a per order delivery cost of ~Rs 45. They should be able to deliver anything where they are able to earn Rs 100+ per order. Potential expansion areas could be: Groceries (experiment on), Medicines, alcohol, documents, personal care products, etc. However, I will ignore all these optionalities for valuation purposes.

The company has a take rate of 22-24% (including ads), and current contribution margin is 4.5%. The management has guided for contribution margin to increase over time to 8-9%. I see a path to these kinds of margins even without increasing take rates; simply by cost efficiency, AOV increase at inflation rate and reduced discounts. Those kind of contributions with high scale could lead to EBITDA margins of 4-5% of GOV or roughly 15-20% on the company;s revenue.

If we give a platform business multiple of 30x EV/EBITDA (company will not really need any capex to grow); that implies that at steady state profitability, company could be valued at 4.5-6x revenues (of the food delivery business). Current food delivery revenue ARR is about 6000 cr, and current EV is about 30k cr (ex cash). Thus we are already at 5x sales; the lower end of the valuation range. Thus I feel that we are already being well compensated for just the food delivery business and effectively getting all the other optionalities for free.

There are 3 things that I worry about:
a) Reliance entry
b) Realistically how many people can afford food delivery > Rs 350/order? Is the potential user base much smaller than we think? The Ken has written about this in detail
c) Self selecting low cost/value restaurants

  1. Bought Chamanlal Setia Exports: Not a great business; but a great valuation. The business can be best described as a very disciplined rice trading operation. The business benefits from fragmentation at both the production side and consumption side and acts as the aggregator in the middle. The only thing that matters is not doing anything stupid like dealing with poor credit quality customers, taking excessive leverage or doing business with companies in countries with sanctions. Their competitors have been guilty of some of these actions in the past and as a result dont exist today. They are still a tiny part of India’s rice exports so growth is not a problem. They turn their Working capital about 2.5x every year and make 10% EBITDA margin on sales leading to about 20% ROCE. The profits each year are reinvested into working capital which is the only thing the company requires to grow. The company is available at 8x P/E which is far too cheap. Should be able to make 20% earnings growth + some re rating to ~12x PE


Also had a few sells in the quarter:

  1. Exited ICICI Lombard: Misjudged the cycle here and ended up buying at the top of the earnings cycle. No change in underlying thesis. Its just that better opportunities were available. End of the day I expect ~20% earnings growth here over the next decade. I could get that with ICICI Bank and HDFC Bank as well at half the valuation. Look forward to owning this again at some point. I think booked about a 15% loss here exiting at ~1220.

  2. Exited PSU Bank ETF: trade largely played out; when people start talking about underwriting discipline at PSU Banks and sustainability of earnings is the time to exit. I felt most of the re rating was behind us and the risk reward quite unfavourable to keep holding these.

  3. Started exiting Delta Corp: Poor Q3 results + weak discretionary outlook coupled with existential threat to the business with the GST issue. Enough to take money off the table in my opinion.

  4. Started selling Arvind Fashions. Recent channel checks indicated very weak sales momentum post Diwali. This will put a dent in the managements margin recovery program as well. At the same time, I had other capital deployment opportunities.

  5. China allocation is being ramped up almost every day.