Max Financial Services Ltd. share price target

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).

During the quarter, MFS registered 19% y-o-y growth in gross written premium (GWP) to Rs. 5,521 crore. Growth in new business premium was also strong. The first year's premium grew by 21.8% y-o-y to Rs. 1,631 crore, while growth recorded in renewal premium increased by 17.7% y-o-y and 54.1% q-o-q. Single premium business increased at a healthy pace of 15.9%...

Disbursement growth was 9% YoY v/s 30%+ YoY in the past two quarters. Consol. AUM grew 8% QoQ/29% YoY to INR55.6b. MEL and SME lending continued to drive loan growth (+30% YoY each). Interestingly, the 2W loan...

Given that the distribution agreement is mutually beneficial for both Axis and MAXL, we suspect that MAXL may become an attractive takeover candidate for Axis Bank This holds optional upside value beyond our TP of Rs 595 (FY21 EV + 13.6x FY21E adj. VNB). MAXL reported a stable 3QFY19 as total APE printed Rs 8.7bn (+11.3% YoY/+1.0% QoQ). Share of protection in the mix rising to 12% (+400bps YoY), higher interest rates and better operating performance pulled 9MFY19 VNB margins (post overrun) higher to 20.4% (+240bps YoY, flat QoQ). On the back of expected 4QFY19 seasonal uptick, management is confident on closing FY19E at VNB margins of ~20.5-21.0%.

India as the product continues to be more of a savings/investment engine, competing with bank FDs and mutual funds (MF) rather than be seen as a safety net. Hence, a bancassurance channel becomes all the more important for the Indian insurance market. Notably, Max Financial Services (MFS) currently has a tie up with Axis Bank, and the bank is one of its primary...

MAXL has a strong franchise run by a credible management. The partnership with Axis Bank is mutually beneficial. While MAXL is open to evaluating acquisition candidates, we suspect it may become a lucrative takeover candidate for Axis Bank after the recent leadership change at the latter. This holds optional upside value beyond our TP of Rs 577 (avg of FY20-21E EV + 22.4x avg FY20-21E adj. VNB). Max reported a healthy 2QFY19. Total APE grew 30.5% YoY to Rs 8.6bn and VNB margins (post over-run) expanded 230bps YoY to 20.4%, with higher protection in the mix (+300bps YoY), rise in interest rates and better operating performance. Management is confident on improved margins in 2HFY19 with the seasonal uptick.