The valuation conundrum
At a price band of Rs 258 to Rs 272, Digit is looking to value itself at $3 billion through the IPO when it lists. According to regulatory filings accessed through data platform Tracxn, in 2022 Digit had picked up $54 million from Peak XV Partners, formerly Sequoia Capital India, which valued it at $4 billion. In 2021, the insurance firm was in talks to raise $200 million, but only managed to shore up around $140 million.
Kamesh Goyal, chairman, Digit Insurance
Speaking at a pre-IPO media briefing in Mumbai, Digit chairman Kamesh Goyal said the price band was based on the assessment made by investment bankers and that the company was leaving value on the table for public investors. The development underscores how Indian startups are coming to terms with the valuation reset across the tech world with the end of the Zero interest-rate policy (ZIRP) era.
By the numbers: Overall, it is a smaller IPO. In terms of fresh funding, the company is raising Rs 1,125 crore compared to the initial plan of Rs 1,250 crore, while the offer for sale from existing shareholders has also been reduced to 54 million shares compared to the initial plan of 109.4 million shares.
At Rs 272, the higher end of the price band, Digit is seeking a multiple of 680 times, compared to an industry average of 46.13 times. The question is: given the dependence of the business on a physical distribution network, will this valuation hold over the next few years, or will Digit get valued closer to the likes of ICICI Lombard General Insurance?
Digit has built a network of more than 61,000 key distribution partners with around 58,532 physical point of sales agents. Going forward Digit expects the majority of its customers to be acquired through its agent and broker network, the company said in its prospectus.
“If Digit is seeking the valuation multiples of a tech startup, then it needs to build more of a tech-based direct business which will keep costs under check and allow it to innovate on customer engagement. Currently, it is very similar to other traditional insurers,” said a founder of an insurtech startup who tracks Digit closely.
Digit’s competitor Acko has raised $489 million in equity funding achieving a unicorn valuation as of 2022.
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Business model
Currently, motor insurance makes up 61% of Digit’s business in a highly competitive market. Health insurance, which is a stickier product with better margins, contributes around 14% of the gross premium.
While the health business has grown, in terms of the share of the overall health insurance market, Digit is still at around 3%.
Overall, Digit will have to up its game across multiple insurance products to continue the premium growth which will justify its valuation multiples.
In a research report published by Muddy Waters on February 8, the US investment firm noted that Digit was able to push up its valuation because of lack of investment discipline among Silicon Valley funds in 2021. “Unfortunately for Digit, due to the Indian regulatory process, it was unable to list while the market was still hot…. This will likely lead to a down round IPO,” the report said.
As things stand, Digit is set to go public at a very crucial time — when there’s a correction taking place in the private valuations of the entire tech industry. In these times, for a new-generation insurance company to go public will make two things clear: the real potential of the Indian insurtech sector, and the actual appetite of Indian retail traders.
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