PB Fintech: the risk was known. Investors chased the stock anyway

PB Fintech’s stock fell another 3.4% on Friday to ₹ 1,166, after plummeting as much as 36% on Thursday. The stock was punished in reaction to Irdai’s consultation paper issued on 23 September, seeking to change the commission structure of insurance intermediaries. The risk for insurance intermediaries was always lurking ever since the Insurance Amendment Bill, 2025 was passed in December.

How much can be the impact? A fair estimate of the adverse earnings impact can be gauged by assuming the proposed commission changes were in effect for the June quarter (Q1FY27).

PB Fintech’s core online insurance commission revenue was ₹ 1,067 crore in Q1. The management has stated that the split between life and general insurance was around ₹ 500 crore each. Of this, commission revenue from life insurance is likely to see a moderate negative impact. Commission from the general insurance business could see about a 60% cut. So, a 60% cut in ₹ 500 crore revenue means a ₹ 300 crore hit in a quarter. For perspective, Q1FY27 net profit was ₹ 163 crore.

Some of the loss could be recouped from higher volumes, as lower commission could mean lower prices for customers if insurance companies pass on the benefit. PB Fintech management expects about 15-20% volume growth owing to the same.

True, it is possible to offset some of the adverse impact of lower commission by cutting costs. Q1FY27 employee cost was ₹ 716 crore. As per the management, the top 50% of the sales force accounts for about 80% of sales. One would assume that leaves ample scope for rationalization of manpower in the bottom 50% of the sales force that contributes just 20% of sales, but the management has ruled out mass layoffs. It remains to be seen how far other expenses can be slashed.

PB Fintech management has also talked about the possibility of manufacturing insurance. But here it must be noted that investors like businesses throwing high free cash flow, a proxy for potential dividend, which is possible in the asset-light business of insurance broking but not in insurance manufacturing, which needs solvency capital, similar to the capital adequacy ratio for banks.

PB Fintech has enjoyed premium valuation multiples versus insurance companies so far, but shifting from an asset-light to a capital-intensive business could mean lower valuation multiples.

For now, Jefferies India and Motilal Oswal Financial Services have kept their FY27 and FY28 earnings estimates unchanged. This is because the implementation of commission changes is expected from FY28. Plus, the consultation paper may undergo changes when finalized after getting feedback in October. However, they have slashed their target price by 25% and 37% to ₹ 1,540 and ₹ 1,150, respectively, due to derating in valuation multiple.

While the quantum of the proposed cut in commission rates is certainly steep, the stock price reaction can also be partially blamed on irrational exuberance among investors. Just before the crash, the Street had valued the stock at a price-to-earnings multiple of nearly 85, based on Jefferies and Motilal’s FY27 earnings estimates.

The valuation was stretched, especially in view of the anticipated negative news flow after the Insurance Amendment Bill was passed. So, the slide in PB Fintech stock is a lesson for investors who kept on chasing richly valued growth stocks, even though the risk was well known.