Analyst corner | Maintain ‘buy’ on Max Financial, target price Rs 550

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Published: August 10, 2019 3:34:06 AM

The shareholding structure is cleaner now, we believe, and factors in the potential for collapsing the two companies (Max life and MFSL) into a single entity, but as of now it does not provide clarity on a distribution tie-up with Axis Bank (AXSB IN, Buy).

Max Life Insurance, Max Financial, target price, Mitsui Sumitomo, Axis Bank, SWAP valuationsMFSL will issue 73.5mn shares (at Rs 422/sh) to Mitsui in lieu of their 383 mn shares in Max Life insurance (at Rs 81/sh).

Max Life Insurance APE growth of 20% y-y in Q1FY20 was robust but adjusted VNB margin performance (on a like-to-like basis) was muted (90 bps drop) due to temporary realignment of prop channels.

The management expects growth in prop channels to pick up. Hence VNB margins should normalise over next the two to three quarters. We factor in long-term VNB margins of 21% and do not see a risk to our long-term VNB margin assumptions.

On Max Financials (MFSL) level, the majority stake of Mitsui Sumitomo’s stake in Max Life will be swapped for shares in Max Financials (listed holding company) subject to regulatory approvals. The SWAP valuations are neutral for the minority stake, in our opinion, as it is broadly in line with the currently traded price for MFS. The shareholding structure is cleaner now, we believe, and factors in the potential for collapsing the two companies (Max life and MFSL) into a single entity, but as of now it does not provide clarity on a distribution tie-up with Axis Bank (AXSB IN, Buy).

Current valuations based on our estimates assume a +75% drop in VNB after FY21F, hence we think the distribution risk is factored into the stock price. Thus we maintain our ‘buy’ rating and target price of Rs 550.

MFSL will issue 73.5mn shares (at Rs 422/sh) to Mitsui in lieu of their 383 mn shares in Max Life insurance (at Rs 81/sh). Consequently, Mitsui will receive a 21.5% stake in MFSL and MFSL’s shareholding in Max Life will increase to 91.8% from 71.8%.

For Mitsui’s balance 5.2% stake in Max Life, MFSL will have a call option to buy and MSI has a put option to sell the stake within 12 months as indicated by management. Valuation-wise we believe the swap valuation is neutral for minority shareholders of MFSL.

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