TP raised to Rs 550 from Rs 492 on rollover to Mar’21F and improving business mix
We raise our TP on Max Financial to Rs 550 (implying 2.8x FY21F EV and ~24% upside) on a rollover to Mar-21F EV and improving business mix. Max Life did well in 9MFY19 with 20% APE growth and strong growth in protection (60%) driving VNB margin expansion in spite of a rise in ULIP’s share in the mix. We have had 2 key concerns: (i) binary risk of Axis Bank exiting the tie-up with Max. We believe the stock is factoring in a ~70% VNB drop if this does happen and, thus, this risk is priced in; (ii) high proportion of PAR in the mix. The PAR share has fallen from 60-70% in FY15/16 to 42% now; this reduces the long-term regulatory risk related to PAR surrenders.
Continuing to deliver well
Max Life delivered 22% individual APE growth vs industry growth of 11% in 11MFY19 with +60% growth in the protection business. The key positive in FY19 was that VNB margin improved in spite of a +10% increase in share of ULIP in product mix vs PAR. We have highlighted that PAR as a product has a high regulatory risk and, hence, believe the change in the product mix for Max Life has reduced regulatory risk materially. We assume 21% margin over the long term and, hence, do not factor in a significant increase in VNB margins from current levels vs guidance of 25% long-term margins.
Axis tie-up: Negative factored in
The Axis Bank distribution tie-up still has a binary risk outcome. We continue to build in a base case of a 20% equity stake transfer in Max Life to Axis Bank from Max Financial Services (MFS). Hence, we include a 50% stake in Max Life in arriving at our valuation of MFS. We believe the MFS stock already factors in the negative outcome of Axis Bank exiting the tie-up, as our sensitivity analysis indicates the stock is pricing in a ~70% VNB drop post FY21F. Assuming a 50% drop in APE and 10-18% VNB margins, in case Axis does exit, we derive a fair value range of Rs 407-503/share.