Max Financial Rating| Buy — Valuations are factoring in binary risks

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Updated: April 29, 2019 4:24:31 AM

TP raised to Rs 550 from Rs 492 on rollover to Mar’21F and improving business mix

Max Financial Rating, Max Financial, PAR share, ULIP share, APE growth, VNB marginsThe PAR share has fallen from 60-70% in FY15/16 to 42% now; this reduces the long-term regulatory risk related to PAR surrenders.

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.

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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.


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