We expect an FY21-23E APE/VNB CAGR of 12.6/16.2%. We retain our ADD rating with an unchanged target price of Rs 645 (FY21E EV + 21.3x FY22E VNB). Despite a difficult environment, MAXL delivered an APE decline of just 3.5% YoY. The margin was 250bps YoY lower mainly due to an increase in reinsurance costs, which the company has passed on 2QFY20 onwards. We expect the margin to improve hereon. We believe the deal with AXSB will provide long-term distribution capability.

Margin contraction due to cost over-runs and low rates Max Life reported APE of Rs6.6bn for the quarter, down 4% YoY. Understandably, new business generation was affected during the quarter due to the lockdown. Renewals growth was 6% YoY. Persistency ratios have dipped across cohorts. In the last earnings call, the management had highlighted that April '20 saw some stress in terms of renewals collections due to grace period granted in light of the covid situation. We would keenly watch persistency ratios from here onwards. In the near-to-medium term, growth in the savings segment is expected to remain weak. Therefore, the management's focus would be on pushing more of protection and non-par...

We believe demand will likely be driven by NPAR (savings and protection) in the near term and then move to PAR as risk appetite returns. We believe demand for ULIPs is still some time away. Increased interest in term and health products. Google trends indicate a steep rise in interest for term and health insurance to near all-time high levels. We also observe increased interest in HDFC Life and SBI Life as companies. Search for ULIPs has decreased significantly, most likely due to subdued markets and customers' desire for stability and assured returns.

Valuation and view. A strategic JV partner such as AXSB provides long term distribution capability, ending uncertainty and market anxiety over the future of the AXSB distribution arrangement. We expect MAXL to lower its dependence on proprietary channels which will be VNBM accretive as investments in channels reduce. We have increased our VNB estimates for FY20/21E by 18.4/15.6%, and fine tuned our DCF assumptions, resulting in a 10.7% increase in TP to Rs 620. Key risks: Lower growth, higher cost over-runs, supply overhang due to promoter pledges, and any hurdles in deal. MAXLs 4QFY20 APE declined 15.1% YoY (better than expected!) to Rs 15.1bn as lock-down impacted sales in Mar-20. Total VNB for FY20 grew 4.8% YoY to Rs 9.0bn as margins declined 10bps YoY to 21.6%. We maintain our BUY rating with TP of Rs 620.

Focus on maintaining absolute VNB in FY21 amid sales downturn Max Life reported NBP of Rs18.9bn for the quarter (5% below our estimate), down 8.3% YoY. Understandably, new business generation was affected due to the lockdown in the latter half of Mar'20. We think that renewal growth was comparably better than ICICI Pru Life and HDFC Life at 15.1% YoY. However, there was some deterioration in persistency ratios in the ULIP segment on account of volatile capital markets. April'20 also saw some stress in terms of renewals collections on the back of grace period in light of the covid situation. Normalcy is expected to return by June'20. In the near-to-medium term, growth in the savings segment is expected to...

Max Financial Services (MFS) posted modest numbers for Q4FY2020,with below expectations operating performance, and posted slower business growth in Value of New Business (VNB) and Annualised Premium Equivalent (APE) due to impaired collections because of the lockdown. The life insurance business, Max Life Insurance (MLIC, MFS has 72.5% shareholding) saw gross written premium (GWP) rise by 6% y-o-y, despite the lockdown, which impacted the last part of March, which typically is a seasonally important period for life insurance players. The 13th-month...

Max Life's overall APE grew 5% YoY supported by decent growth in single & regular premiums. Protection segment remains the key focus with shift of Product mix to NPar savings continuing. Margins remained stable YoY at 21.6% for FY20 (but improved sequentially to 22.8% in 4Q20) on account of support from NPar growth. Persistency has improved across all buckets except the 61m persistency (upto Mar'20 i.e.11m) being affected by the ULIP segment. We retain BUY with revised TP of Rs518 (Rs610) valuing Max Life based on 2.3x Mar-22 EV (from 2.6x Sep-22 EV), we reduce Holdco discount...

Valuation and view. A strategic JV partner such as AXSB provides long term distribution capability, ending uncertainty and market anxiety over the future of the current AXSB partnership arrangement. We expect MAXL to lower its dependence on proprietary channels which will be VNBM accretive as investments in channels reduce. We rate MAXF a BUY with an increased TP of Rs 560 (MAXL: Mar-21E EV + 25.0x FY22E VNB). We have not changed our estimates but we remove the 22% discount to VNB, reduce holding company discount to 10%, build in a 10x multiple to annual leakage at MAXF, and lastly we adjust our cost of capital downward to reflect lower rates. Key risks: higher cost over-runs, supply overhang due to promoter pledges, and non completion of deal. JV with AXSB provides long term distribution capability to the business and ends uncertainty and market anxiety on the future of the current partnership. We expect dependence and hence investments in proprietary channels to reduce, thereby increasing VNB. We rate MAXF a BUY with an increased TP of Rs 560 (Mar-21E EV + 25.0x FY22E VNB).

Max Financial announced a 29% stake acquisition by Axis Bank in Max Life Insurance yesterday for Rs16bn (link). The deal announcement comes on the back of Axis Bank and Max Financial entering into exclusive talks to explore a long-term strategic distribution partnership some time ago. Despite delivering comparable margins and profitability, Max Life's valuation has always been a few notches below comparable peers. A major overhang on the stock has been lack of permanency on the distribution front. The distribution arrangement with Axis Bank, which accounts for 55% of the business, was due for renewal in Sep'21. With this deal, we believe these concerns stand largely addressed. The transaction would bring together 3rd...

Max Financial Services Limited (MFS) announced that it had signed definitive agreements with Axis Bank Limited (Axis Bank) where the companies will be joint venture partners in Max Life Insurance Company Ltd (MLI). As per the agreement, Axis Bank will hold a 30% stake in Max Life once the deal is finalized in 12-18 months (expected), pending regulatory approvals. Due to the cap on the stake that a bank may hold in a life insurance company, Axis Bank stake is likely to remain at 30% in the JV. However, shareholders of MFS...

Max Life's total exposure to Yes Bank is ~Rs20bn in the form of tier 2 bonds, out of which ~Rs10bn is at the shareholder level. The balance ~Rs10bn is divided equally at the policyholder level between ULIP and par (Rs5bn each). In the worst case scenario, under which a complete write-off of the shareholders exposure is taken, the impact on EV would be 10%. The management is of the opinion that it is unlikely to face any haircuts on the tier 2 bonds exposure at the shareholder level since it has never happened in the history of Indian banking M&A;/restructuring. Note that the tier 2 bond exposure enjoys a cushion of ~Rs360bn (Rs270bn equity, Rs90bn tier 1 bonds). While...

With a new indiv. tax code and Axis Bank embracing open architecture we expect business growth momentum to slow down in FY21-22E. Additionally, we continue to watch out for the renewal of partnership with Axis Bank. We rate MAXF a BUY with an changed TP of Rs 560 (MAXL: Dec-20E EV + 18.8x FY22E VNB). We use a holding company discount of 30%, continue with a 22% discount on VNB for Axis Bank deal, and a 10x multiple to annual leakage at the holding co level. Key risks include lower growth, higher cost over-runs, and supply overhang as a result of promoter pledges. MAXL reported in-line nos with total APE growing 16.0% YoY and 9MFY20 VNB margin was at 21.0% (+60bps YoY)- high costs continue to weigh on margins. We maintain our BUY with TP of Rs 560.

Max Life Insurance (MLI) reported 3QFY20 results with the key pointers being (1) APE growth strong at 20% (2) Distribution mix stable; status quo on Axis partnership (3) EV up 22% YoY, driven by growth in VNB (4) 13th month persistency improved 200 bps over FY19 to 85%. Also, see comprehensive conference call takeaways on page 2 for significant incremental colour. Per se, on the key financial items, MLI posted NBP growth of 18% YoY at Rs14,020mn and PAT growth of 91% YoY at Rs1,540mn. We have retained our estimates for FY20/FY21/FY22 and Buy rating on Max Financial Services (MFS) with a target price of Rs653, valuing the stock at 2.1x H1FY22E P/EV. Also, see our recent initiating coverage report on the life insurance sector: A...

Max Life Insurance (MLI) (holding company Max Financial Services) continues with strong operational performance (healthy margins, adequately capitalized and attractive EV growth) and thus is an attractive business franchise (6% overall market share). MLI's best in class 13th month persistency, indicates good customer retention and effective client communication, critical for the life insurance business. Uncertainties regarding pledging of shares, future of ownership, etc have been a drag on Max Financial (MFS; Holding company), and we...

Max Life Insurance (MLI) (holding company Max Financial Services) continues with strong operational performance (healthy margins, adequately capitalized and attractive EV growth) and thus is an attractive business franchise (6% overall market share). MLI's best in class 13th month persistency, indicates good customer retention and effective client communication, critical for the life insurance business. Uncertainties regarding pledging of shares, future of ownership, etc have been a drag on Max Financial (MFS; Holding company), and we...

With Axis Bank embracing open architecture and adding a life insurance partner we expect business growth momentum to slow down. Additionally, we continue to watch out for the renewal of partnership with Axis Bank. We cut our APE growth and VNB margin assumptions. We rate MAXF a BUY with a reduced TP of Rs 565 (MAXL: Sep-20E EV + 19.4x Sep-21E VNB). We use a holding company discount to 30%, and continue with a 22% discount on VNB for Axis Bank deal, and a 10x multiple to annual leakage at the holding co level. Key risks include lower growth, higher cost over-runs, and supply overhang as a result of promoter pledges. Increased costs (16.7%, +200bps YoY), dampened VNB margins to 21.0% (+60bps YoY) despite high NPAR savings share (20%, vs. 5% YoY), and change in assumptions (business and tax), aiding margins +230bps.

MAXF have put up to withdraw the application for share swap & purchase transaction for MSI's stake in Max Life for MAXF shares as agreement for finalization of definitive terms were not reached. MSI will remain as JV partner of Max Life continuing existing arrangements. Transaction arrangement may not be required for reverse merger but some issues have to be ironed out like a one-off pending contingent liability from erstwhile telecom investment. Management also showcased confidence on being strongly associated with Axis but are still to reach any arrangement for future course of action. Key...

While this transaction simplifies corporate structure paving way for potential M&A or folding up of MAXL into MAXF and is value accretive for minority shareholders, management was unable to clearly spell out its end game. This adds an additional layer of uncertainty to the one that already exists- renewability of partnership with Axis Bank. We rate MAXF a BUY with TP of Rs 589 (MAXL: FY20E EV + 21.9x FY21E VNB). We have increased our holding company discount to 30% (vs. 15%), and continue with a 22% discount on VNB for Axis Bank deal, and a 10x multiple to annual leakage at the holding co level. Key risks include lower growth, higher cost over-runs, and supply overhang as a result of promoter pledges. Despite an increasing share of NPAR savings (15% share, +3.7x YoY), and change in assumption which helped margins expand 160bps YoY, VNB margins disappointed at just 19.6% (+150bps YoY).

Max Life Insurance (MLI) reported 1QFY20 results with the key pointers being (1) MLI reported new business APE growth of 23% YoY despite proprietary channel being relatively soft (2) 13th month persistency improved 200 bps QoQ to 85% but surrenders hurt (3) Margin improvement on account of favorable business mix negated by cost overrun due to seasonally low business. Also, see comprehensive conference call takeaways on page 2 for significant incremental colour. Per se, on the key financial items, MLI posted NBP growth of 19% YoY at Rs9,110mn and PAT decline of 9% YoY at Rs687mn. We have revised our estimates for FY20/FY21 and have retained a Buy rating on Max Financial...

Max Life Insurance (MLI) reported 4QFY19 results with the key pointers being (1) MLI reported new business APE growth of 22% YoY aided by robust channel performance (2) 13th month persistency improved 300 bps to 83% (3) Margin improvement on account of favorable business mix; cost overrun likely to trend down next year onwards. Also, see comprehensive conference call takeaways on page 2 for significant incremental colour. Per se, on the key financial items, MLI posted NBP growth of 20.6% YoY at Rs20,620mn and PAT growth of 5.6% YoY at Rs2,136mn. We have revised our estimates for FY20/FY21 and have retained a Buy rating on MLI with a revised target price of Rs549 (from Rs535...