Max Financial Services (MFS) and Max Life have entered into an agreement for a potential merger with HDFC Life. Under this arrangement, Max Life will first merge with MFS, which will in turn merge with HDFC Life. This arrangement will ensure an automatic listing for HDFC Life.
We assign 75% probability to the proposed merger going through, resulting in significantly better growth prospects for Max Life (addition of several bancassurance partners). While the swap ratio remains unannounced, we believe eventually HDFC Life would trade at 2.5x+FY18E EV, given the strong growth and return profile of the combined entity.
We like Max Life for its management quality, higher proportion of long-term savings business, healthy operational efficiency, strong bancassurance tie-ups, robust return ratios, and excess capital position. Further, potential merger with HDFC Life is expected to increase the granularity in distribution network. Our probability-weighted target price reflects the upside to appraisal value from possible improvements in operational performance. We value Max Life on appraisal value methodology, leading to pre-merger value of `160 billion (2.4x FY18E EV) and post-merger value of `225 billion (3.3x FY18E EV and 3x FY18E EV excluding dividend payouts). Adjusting for MFS’ 68% stake in Max Life and adding the `2.7 billion cash with MFS, we arrive at a post-merger TP of `545/share.