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Anurag Singh

Nov 1, 2021 • 25 tweets • 10 min read • Read on X

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#PolicybazaarIPO Long thread: There is monetary printing by RBI, there is lending by banks & finally there is the Indian IPO. “Foreign owned” company with ~1 Bn investment is selling “Indian” unicorn to “savvy” Indians for $ 6.2 Bn. Want to know how this printing works? Let’s go-

The basics: Rs 6017 Cr being raised by new shares (Rs 3750) & re-selling (Rs 2267). Face value Rs 2 offered at Rs ~1000 per share is one of a kind. Who decides the price? Examine the valuation ladder below.
With ~$ 150 Mn invested till 2017, we see $ 525 Mn rushes in after 2018

So, a company valued $1 Bn in 2018 & $ 1.5 Bn in 2019 by key investors like Tencent, suddenly “needs money” in March 2021. Falcon Edge “invests” all of $ 75 Mn in March at valuation of $ 2.65 Bn.
Enter IPO bankers a couple of months later & they value the company at $ 6.2 Bn

Why does PolicyBazaar need $ 75 Mn just 6 months before IPO & give away 2.5 times in returns? And it doesn’t even use that money as the B/S reflects appx Rs 1000 Cr in cash lying around.
What kind of a favor is that? Why do they need US investment bank for this just before IPO?

Notice 50% rise in shareholding of promotors here & a 1: 500 bonus share issue. After all, how do you print money & still keep share price at “reasonable” Rs 1000?
Without bonus issue in June 2021, each share would have costed Rs 50,000. Heard of circular valuation?

Well, let’s move on to the business model & future potential here. The whole story is tied to the “enormous potential” of insurance in India & how under-penetrated it is.
The DRHP devotes significant weight to mark & Sullivan report on Indian insurance. See the snapshot below:

DHRP quotes “Indian life insurance premiums will grow at 18% CAGR from 2021 till 2030". The 2020 (pre covid) premiums were Rs 5.7 lac Cr.
It adds reasons – under-penetrated market, demographic dividend, need for life insurance, blah blah. So what’s wrong with this?

Well, for one, try searching any other report from Frost & Sullivan for last 10 yrs on Indian insurance. You find nothing. So let me quote no less than the #BCG report for Indian insurance in 2011.
Life insurance was to grow 8 times from 2011 to 2020 to a premium of Rs 20 lac Cr

Except that it didn’t. Not only did #BCG missed the mark, it missed it by 70%. Life insurance could muster a measly Rs 5.7 lac Cr in 2020. A projected CAGR of 25% came to barely 4% for a decade. But it is BCG, so in 2021, it says “Indian has disappointed". Disappointed whom? BCG?

The fun doesn’t end here. The same consultants publish with yet another report in 2021 & this time take a CAGR of 15% till 2025. The same as Frost & Sullivan report that PolicyBazaar quotes.
Most within industry know that it not feasible. But it does help bullish IPO, never mind

Move to another lever of growth: The power of digitization & why PolicyBazaar can do what insurers couldn’t. Drive online business at low cost.
Let’s examine this myth in view of life insurance that is almost ~60% of revenue for PB. Life ins is a people intensive push business.

There comes complexity of scale. Look at below P&L & examine the employee expense. These range from 80% in 2019 to 62% in 2021, despite positioning for IPO. It's standard for life insurance biz.
How can #policybazaar scale digitally when 65% costs are employee expenses?

And it talks of opening branches for better conversions (Read - selling insurance like bank RMs do). Aside of term plans, life insurance is pushed by salesforce.
Revenue = Salesmen x policies sold x avg premiums. Can't beat this equation. Have you ever bought a ULIP on your own?

Talking of push, let’s compare the revenue growth for PB with some banks. Firstly #SEBI, pls ask 5 yr financials for loss making cos seeking to list. Post Covid, 3 yr P&L doesn’t tell us much. Of course, PB also hasn’t disclosed anything more.

If you’re impressed that losses in 2021 have reduced, just notice "advt & sales promotion" expenses. If we keep the same proportions as last 2 yrs, the loss % would be exactly the same.
But magically, the promotional exp reduce in IPO year. How? Ask Zomato & Paytm. Same trick.

For a ~ Rs 1000 Cr sales, the valuation of #policybazaaripo is 46 times SALES. You heard it, “times sales, not profits”.
Assume a 15% profit margin in distant future, the PE works out at ~ 306. So how about banks that earn similar revenues from brokerage?

IndusInd bank earned Rs 4500 Cr from fee income & its valuation is $ 12 BN. Axis Bank with Rs 14,000 fee income is valued at $ 30 Bn. And these are BANKS where fee is just a side income.
PolicyBazaar with just Rs 1000 Cr (fee income) revenue is asking $ 6 Bn !

Last resort – “Well PB is not only insurance but PaisaBazaar also. It is expanding into lending & can make money there”. Well, not really.
First, PB is 70% insurance biz. Second, the PB revenues have been growing on “outsourcing services” & “Online consulting”. What's that story

#PaisaBazaar revenues have fallen adversely due to lack of loan disbursals in covid (Paisa Bazaar loan disbursal fell by 50% in FY 21). But there is always Frost & Sullivan with their rosy projections (no track record), under-penetrated loan market, & blah blah.

Again, not happening. Loan growth in India has been falling consistently since 2019 as the below chart indicates (Sajjid Chinoy of Morgan Stanly).
If banks can’t have loan growth, brokers like #paisabazar can’t grow more on their backs.

Finally, look at contribution margins for #policybazaaripo . The margins look fine in 9 – 13%, but bloat to 39% in the IPO year.
Suddenly, revenue seems to go up with a fall in employee costs & promotion expenses. This one-year fall raises more questions than it tries to answer

Let not all pessimism cloud us. Yashish Dahiya, Alok Bansal & team have built a unique company that tries to make buying insurance easy, less messy with digital touch & good service. Hats-off to their resilience as entrepreneurs.Very few can do this in a tough & regulated market

Conclusion: To buy or not to buy?
We have a business that grows 4 times in valuation in 3 yrs & 2.5 times in just 6 months, operates in an industry that has grown by just 4% CAGR in last decade. The business is people intensive & digital scalability benefits are limited

With no 5-year financials, sharp drop in expenses in 2021 look out of line with trend. To pay 305 PE multiple for a semi-mature business, looks very pricey.
Light all fire crackers this Diwali but stay away from this financial bomb. You may burn your fingers.

A correction- #PolicybazaarIPO issued 1:499 bonus shares in June 2021. Had it not done the bonus issue, the IPO share price would have been Rs 5 lac per share ( not 50k as quoted earlier). Now you know the reason behind bonus shares.

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Anurag Singh

@anuragsingh_as

Mar 30

LONG POST: #EconomicTimes article
Why does the India bull look tired?

Over the past week, Indian equity markets are up almost 2% with the Nifty trending at 23,589. Retail investors are happy and renowned experts are going out and claiming it to be the ‘start of a new bull run’. However, there are a few who feel the next 10 years will be different from all the past boom periods that India has witnessed so far.

In the past two decades, the #Nifty50 has returned 12% annually. Smart investors believe the country can do far better than this number in the coming decade. But markets are cyclical in nature. There is a high chance that we might actually get lower annual returns compared to the past.

Markets have had a sizeable correction from the highs seen in last September peak. It has been a painful grind in the last six months for investors. For nearly 80% of them, the correction is somewhat a new phenomenon, and totally unexpected. These new investors had come in for linear returns and were trained to ‘buy the dips’. They had the best for the past 5 years, up until now.

When the story was about demographic dividend and companies rising to fulfill the unsatiable demand from young India, why should that come to a halt? Why do stocks correct after all when the going is so good? And why would foreign investors want to leave in such a hurry?

All great questions. For those who started after 2020, there are some valuable lessons to learn here. Well before they prepare for the next bull run.

What was driving the rise?
When you buy a stock, you buy a share in its earnings. The earnings per share (EPS) decides the price it should trade at (at least some of it). The other element comes from the market sentiment, which relies on future prospects for the current earnings. What India witnessed last five years was the boost on both these elements. Let us look at earnings first.

Nifty EPS was around INR430 by end of 2019. During the next 4 years, by the end of 2023, it rose to INR950. That is an astounding CAGR of 22%. If you looked at the historical 10-year trend till 2019, the range was much below 10%. This earnings surprise increased valuations. Common sense would tell you that Nifty should double too. And it did. From 12,500 to neat 25,000 rise was largely justified. At least in theory!

If we broaden this story and look at the entire listed corporate space, corporate profits jumped from around INR4 lakh crore (USD45 billion) to INR16 lakh crore (USD170 billion) during the same duration. This was nearly 4.8% of GDP. No wonder, we saw a bump in valuations across Nifty 500 Index.

Markets assumed the similar rate of growth and priced the stocks accordingly. Not to forget, the flow of domestic money to mutual funds provided more gas to stocks outside of Nifty 50. The mid- and small-cap stock prices grew significantly higher, at almost 30% CAGR for 4 years. This was far in excess of the EPS growth in these stocks.

This super growth phenomenon however is always shortlived. We’ve had these phases before. There is nothing new about this.

Look at the above chart for corporate earnings to GDP ratio, which is a very reliable indicator of how well the listed market is doing within the larger economy. We see that corporate earnings grew from 2.1% of GDP to 4.8% of GDP between 2020 and 2024. However, we can also see a similar rise to peak between 2003 and 2008, after which a period of slowdown began till 2019. While this doesn’t imply that the path will exactly be the same now, the key message is that earnings are cyclical. And so is the Indian economy.

Why did the markets fall and why now?
Though the market had accounted too much exuberance in 2024, it failed to recognise this EPS growth was never sustainable.

So, why did the earnings spike post 2020?
A confluence of factors resulted in earnings growth post 2020. Firstly, banks’ balance sheets were already clean after years of NPA write-offs post 2014. After pandemic, we had a sudden demand surge — IT services got huge demand boost from US, there was discretionary revenge spending by consumers & finally the govt capital expenditure increase 4 times to INR11 lakh crore (USD125 billion). All of this happened within 3 years. Indian retail credit penetration increased from 20% of GDP to 43% of GDP. So much of the consumer spending was done with credit binge too.

All that spending is behind us now. So, unless you have a reason to believe that the economy has drastically improved after 2020, it is safe to assume that the earnings growth will also correct. And this is already underway since 2024. Estimates for Nifty 500 companies is at 7% topline growth. This is just about keeping up with inflation.

For context, look at the topline growth for #Nifty500 companies below. It tells a similar story since 2010 where sales growth slowed after 2009. And then the huge spike after 2020.

While sales growth slowed by 2022, margins expanded, which concealed the slowing topline. That provided some cushion to the EPS story for a year. However, EPS can’t grow continuously if topline stagnates.

When will markets capture previous peaks?
Depends on your outlook on earnings and India’s economic growth. It is worth noting that after 2009, corporate earnings grew at single digits for next 10 years. Nifty 50 and Nifty 500 returns were in the range of 8% and 7%, respectively for the next decade.

The situation was not exactly the same then, and reasons may be different now. But the economy does go through a period of moderation after every exuberant cycle. So do markets.

The current correction should not be seen as a minor blip that recovers fast. It is unlikely to be a V-shaped recovery because it is not driven by a special event. It is a sales slowdown which has been in the making for 18 months now. Just that the earnings took some time to reflect that.

Thus, the recovery may take as much time as it takes for the consumer to recover. Also remember, the market slowdown impacts gross spending levels too. If you don’t have stock buoyancy, you are unlikely to buy bigger homes or take that exotic holiday. As government tries to contain fiscal deficit from 4.8% to 4.4% of GDP this fiscal year, the spending boost from the Centre may become difficult.

With history, it is safe to assume that junk stocks will not gain the glory they did. But eventually, markets do recover if the economy continues to march forward. That is the key here. If the GDP growth stays in 6% range, corporations will figure out a way to come out of the earnings stagnation. And some new winners will emerge.

My sense is that next 5 years may be a period of moderate growth in #India , wherein market absorbs the current high valuations. They may appear cheap on current earnings but are probably not accounting for likely slower growth in future.

Eventually, the returns from Nifty 500 are likely to be around 10% for the decade between 2021 and 2031. So, you will be fine as long as your portfolio is well balanced. Ignore the noise and get back to work. If you were expecting this to be a linear rise, then that assumption was never right to begin with.

One last thing
The comparisons that forever bullish gurus quote from US markets don’t apply to any other country. If you pick a historical point from US markets, you can prove almost anything. India story works differently too, unless the economy undergoes a drastic transformation, something like China had for last 30 years. While that is possible, it is also extremely rare.

And this is exactly where the bulls and the bears begin to differ substantially. You can take your pick. The perma-bulls continue the story of India imitating China growth. The story has been alive for 25 years now. Evidence and experience do not justify this thesis.

A healthy dose of realism is always good in investing. Else, you end up buying expensive con stories from faceless sellers who get rich with your money. Some of you may have realised that by now.

The India bull ran fast as it could. But it needs some well-deserved rest. Let it rest for now.

The chart is “corporate earnings to GDP”. Pls ignore the header. Numbers are fine.

Corporate Earnings to GDP over the years

Read 4 tweets

Anurag Singh

@anuragsingh_as

Feb 14, 2024

Follow up Thread 🧵: Farmers Protests:
They’re back!
If Karl Marx were to hear about the farmers protests today, there is a chance that he would be back too. Just like the farmers are back with the same old MSP demand, that is not only un-justified but unethical too.#FarmerProtest2024

See the picture above Does the farmer in the picture needs a govt subsidy or support?
The gentleman circled in red is a typical rich farmer. What about those circled in blue, that are almost forgotten in background. Now who needs govt support? Who needs the MSP?

Marx would define these farmers as classic “Bourgeoise” that us “Proletariats” should fight against. But there is something that either motivates them or keeps them dis-satisfied.
What forces the wealthiest (Yes) ones to come out, protest for higher prices for farm produce?

Read 26 tweets

Anurag Singh

@anuragsingh_as

Jan 30, 2024

Short Thread: HDFC BANK
Why are the FIIs selling the largest bank?

A classic case of different paradigms – You have a framework of valuation & begin to wonder why the world is not getting it? There are 2 options – Either understand the other paradigm or change yours. #HDFCBank

I’m not sure if you will change your valuation framework. But at the end of this post, you will definitely understand why FIIs may be selling.
I’ve always been perplexed by this comparison that I’ll share now. Let's take a quick dive -

Book size:
Look at the top 3 US banks that collectively control 45% of assets & lending amongst US banks. Compare the size & scale.
HDFC bank is appx 1/10th of a Bank of America(BOA) in assets. JP Morgan is 12x & Wells Fargo is 6x of HDFC in assets.

Read 15 tweets

Anurag Singh

@anuragsingh_as

Dec 27, 2023

LONG THREAD: SBI Cards IPO Follow-up:
Revisiting the #SBIcards IPO thread (Mar-2020). IPO price - 755, price today - 768.
In Mar'20, I quoted "They say market is a great teacher. If this one makes money for investors, I definitely would have missed some lecture in investing".

Well, looks like some of us did learn something. Markets at all time highs, SBI cards is still flat since 3 years. I don’t want to sound arrogant claiming victory. We are all learning here. So let's revisit what SBI cards promised (or implied) & what it delivered. Here we go -

Cards in force & spends:
We see glossy numbers again in FY23 annual report: 22% YoY growth in cards,30% YoY in receivables. What is the benchmark? Is it good enough vs IPO projections? Why are the graphics starting from 2019, exactly when the pre IPO disclosures end ????

Read 21 tweets

Anurag Singh

@anuragsingh_as

Sep 19, 2023

LONG THREAD: Golden Era for Indian Equities - Behind or Ahead ?
As Nifty crossed 20K, time to take stock of what returns to expect in future?
Examine the journey so far & a critical analysis on CAGR returns which are not quite the story we’re sold. Let’s go for a ride:
1/n

We’ve all heard this story. Had you invested in Sensex at inception in 1979, you got 660x returns, CAGR of ~17% . Simple math- Sensex started at 100 & now is hovering at 66,000.
If only making money was that easy. Argument is not that strong if we scratch below the surface.
2/n

I’ll make an effort to validate if there is more to this story than meets the eye. And there is.
As most funds like to present the market returns since inception in 1979, it is important to see the Indian stock market history in 4 distinct decades.
3/n

Read 25 tweets

Anurag Singh

@anuragsingh_as

Dec 23, 2022

@EconomicTimes

The golden era of Indian stock markets - Behind or Ahead of us?

My piece for ⁦⁦@EconomicTimes⁩ analysing Indian markets since inception in 1979.

economictimes.indiatimes.com/prime/money-an…

I’ll post a thread later if you can’t read behind the paywall.

Here is the detailed article in 10 tweets thread if you were unable to read behind paywall -
1/10

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