3 factors for higher profitability in PB Infotech

Yashish Dahiya, Chairman & CFO, PB Fintech, says “we have made profits despite Rs 200 crore of losses on new initiatives. So the core businesses are at Rs 200 crore profit already. That is the real mix here. As they mature, new initiatives stop making smaller and smaller losses also. So it becomes a kind of double treat.”



How is the contribution margin?

Yashish Dahiya: In our business, we have a 40-45% contribution margin. What that means is every time we do one rupee of extra revenue, 40-45% of it comes into contribution and below that is our fixed costs. That is called operating leverage and as your business expands, you contribute some amount to it. So in the first nine months, our revenue has expanded by about Rs 500 crore and of that, Rs 170 crore has flowed directly into the EBITDA and that is telling us that 34% of our revenue is flowing directly into EBITDA that is what is called leverage.

As you scale, you become more and more profitable. One thing which is very clear is if you take a nine-month view, do not look at it just quarter by quarter. This is not a profitability which has been achieved by controlling costs. So sales costs, marketing costs, nothing has been brought down. It is a very straightforward business in that respect.

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The second thing that happens is as time progresses, since the brand is evolving and consumers’ trust is evolving, the conversion rates keep improving, our technology efforts are higher, our efforts on creating better products are higher, better products and better insurance products for consumers. So the conversion rate slowly keeps inching upwards.

We are not disclosing, but the premium per enquiry is the way we look at it and it is significantly higher than what it was last year which was significantly higher than what it was last year right. That means that every year, we are getting more and more efficient. Now this year, our profit and our contribution is understated by about 2% and that is because health has grown 20% faster than the growth of the overall business.

So if the overall business is grown by X, health has grown by X plus 20 and in the first year, we make zero contributions on health because health is a renewals revenue business. And so if you really think about if health is 25% of our business and we grow 20% faster, you have got a 5% additional growth on health, you are a 40% contribution business but you on health you are making zero. So you are losing 40% on 5% which is roughly 2%. So if instead of health, we had grown all our other products in a combined manner, our EBITDA would have been 2% higher which is about Rs 870 odd crore. That is broadly the difference and that is the real ingredient.

The second part is renewals. As you get older, your renewals become larger, and they contribute a higher margin than fresh business because you put in a lot of effort in business. You cannot get renewals without fresh business, of course, and as I said in health we do not even make money on the first year right because you have put in all the effort and you hope that the customer will stay with you for a long time and so that you will reap the rewards of your effort over the coming years. So yes it is really that.

Just a quick follow-up on that point which you spoke about operating leverage it has started kicking in. The beauty about operating leverage is that once it starts, it only gains momentum. So can we assume that in your phase of the business also that it started kicking in? It may only accelerate the momentum way in the next coming quarters. Is it okay to assume that?

Yashish Dahiya: A very critical thing that people should watch out for is look at the last seven quarters and see how much has for the core business leave out the new initiatives for the core business, how has EBITDA moved and you will notice it has increased by more than Rs 50 crore every quarter year on year. That means for the year, it has always grown by more than Rs 200 crore.

Now that is the operating leverage and once the operating leverage kicks in as it has been kicking in for the last two years, our core businesses have been significantly profitable. They have about 12-13% EBITDA margin right now. Now, the reason why our profitability got delayed were two. First of all, we started new initiatives at IPO.

Most companies were trying to go towards profit. We were moving away from profit because we felt new initiatives were very critical for the long term of our business. We expanded losses through new initiatives. Our losses on new initiatives even this year will be almost Rs 200 crore. So what am I explaining?

We have made profits despite Rs 200 crore of losses on new initiatives. So the core businesses are at Rs 200 crore profit already. That is the real mix here. As they mature, new initiatives stop making smaller and smaller losses also. So it becomes a kind of double treat.

The third aspect is our ESOPs because of accounting treatment, they were stated as very high in the past. And we had pointed out that as time progresses, they will become less and less critical and that is also playing out. All these three factors will lead to higher and higher profitability as time progresses.

At the top management level with this kind of performance under the belt for the quarter, the kind of commentary which we are hearing from you all, what will be the strategic areas of focus three to four quarters far out – between now and the next one year?

Yashish Dahiya: It depends on what you call strategy. Our business changes every few years. When we started, we were an advertising and marketing company. We were mostly lead generators for insurance companies. Later on, we became a sales company and a fulfilment company. Then we became a data company. Then we became a tech company and then we became a data company. This may not be visible from outside. But from inside, when the insurance companies deal with us, they see that change every two to three years.

So we keep changing along that path. And we will keep getting deeper on that path. Our job is to serve our customers more and more. We have got, in the last couple of years, a heavy push on claims assistance, etc, etc.

We have applied for an account aggregator license, we are in the process of thinking about payment aggregation, we have applied for a reinsurance brokerage license, all of these are signs of where we will evolve to and how we will make our business deeper. We have an investment in Visit Health already, which is an outpatient and a healthcare portal. So we are also making progress on that we already own 40% of that company. These are all strategic pieces coming in.

We will get deeper and deeper into our services and control more and more of our service layer so we can give a better experience to our consumers. Of course, that will mean we will control a little more of the value chain, one way or the other or influence a little more of the value chain but what we will not do is we will not ever compete with our partners. So we will not become an insurance company. We will not become an NBFC. That is really how we will operate.

How are things shaping up at Paisa Bazaar? You had indicated earlier that the growth will be slightly slower there. How are things shaping up because there is also a regulatory glare out there, the speed at which consumer loans, especially unsecured ones are being dispensed.

Yashish Dahiya: Yes, you are absolutely right. See, we were never part of the huge growth. So we never grew 200-300% a year, we were always growing at 50%, 40% a year. And that story has been consistent for the last 15-16 years. But as they say, you know, when a big shift happens, everybody gets impacted. So yes, the regulator has raised concerns about personal loans. While, we do not do the sub 50,000 rupee personal loans, we are mostly in the Rs 2-3 lakh personal loans category. But even lenders cannot even be seen to be business as usual, when a regulator points out that, I think there is something that you must look at.

So the boards of companies have to look at it, even though they do not see anything immediately in our portfolio. That implies there is obviously a slowdown in pretty much all the partners. Plus, there is an incremental cost of lending on the personal loan side. So that does temper the market a little bit. And as I said, 10% lower growth. So if we were growing at 40%, we will grow at 30%. I think that is how we think about it.

If last quarter, we grew at 36%, we may grow at 26% for the next quarter. We cannot be that specific with guidance but that is broadly how we see it. We also expect it to be a quick one. The reason we expect it to be a quick one is, we are one month into it, probably it will last another two, three months. Look, how do banks make money, they have to, unsecured loans are a great way to make money.

Eventually, everybody is sitting on large bases of deposits. So they have to come back on this. And there we can see lots of new entrants coming in here. We think it takes time to on-board new partners and in getting existing partners to become aggressive again. But I think we should see that by the end of this quarter.

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William Murphy

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