Analyst Corner | Max Fin: Upgrade to ‘buy’; target price revised to Rs 590

By: |
April 30, 2020 12:42 PM

Moving Sumitomo Mitsui’s 20.6% stake in Max Life up into a 21.9% stake in MFS. An attempted merger of MFS with Max Life. Axis Bank also retains an ability to move its stake in Max Life to the MFS (listed) level if the merger leg does not pan out.

Axis Bank also retains an ability to move its stake in Max Life to the MFS.

The Axis Bank board has approved an agreement with Max Financial Services (MFS) to acquire a 29% stake in Max Life Insurance (72.5% owned by MFS). This is first of a series of steps that will culminate in MFS and Axis Bank becoming 70:30 shareholders of Max Life.

This very nearly brings closure to the all-party intent consensus publicly communicated in February 2020; to flesh out a deal on an arm’s length, confidential and open-books basis (‘Glass half full; all parties agree’). All that remains now, is the necessary regulatory approvals for the four-step scheme of arrangement. The arrangement involves a settlement for telecom-related tax liabilities in MFS (@Rs 120 crore).

Moving Sumitomo Mitsui’s 20.6% stake in Max Life up into a 21.9% stake in MFS. An attempted merger of MFS with Max Life. Axis Bank also retains an ability to move its stake in Max Life to the MFS (listed) level if the merger leg does not pan out. If even this cannot be worked out in 63 months, Axis Bank also has last resort rights to exit its Max Life stake at a valuation of Rs 56,400 crore. We reduce our holding company discount from 50% to 10%. Investors should interpret this as our take on the odds of the deal going through (mostly defined by RBI allowing 30% stake). We also factor in MFS’ 28% dilution and 70% final stake in Max Life. Hence, we revise our target price to Rs 590 from

Rs 430 and upgrade to ‘buy’.

As outlined in ‘Good Life@Club Banca’, skin-in-the-game banca partnership is key to interest alignment on profitability critical ULIP renewals. If Axis Bank did not see renewal effort driven value creation for Max Life as a win-win, the strength of Max Life’s business model is significantly worse off, investments into proprietary channels notwithstanding.

Deal consummation will still remain subject to very likely but nevertheless non-trivial “regulatory proof”. Minority investors, however, can finally see the escape hatch to what has frankly been four long years stuck in the purgatory of deal hope and disappointment. Valuations at 1.7x FY21E P/EV now appear attractive, given reduced uncertainty.

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