We continue to believe in the value of its franchise and find the stock attractive at these levels.
Max Life’s stock has significantly underperformed peers, likely on the back of concerns of continuity of its partnership with Axis Bank. Its recent decision to consider a large capital issuance in order to acquire other life insurance company(s) can potentially alter the dynamics. We continue to believe in the value of its franchise and find the stock attractive at these levels. We will nevertheless watch out for strategic developments at the company. Retain Buy with price target of Rs 700 (Rs 670 earlier).
Highlights of Q3FY18 results
o Moderate growth continues: Individual APE growth was up 18% y-o-y in 9MFY18 and 19% in Q3FY18. The company reported 65% growth in January 2018. We are revising our growth forecast to 20% for 2HFY18 from 25% earlier translating into 19% APE growth for the year from 22% earlier. If the January 2018 trend continues, we find upside to our revised APE assumptions.
o Earnings down, in line with guidance: Earnings declined to Rs 1.5 bn from Rs 2 bn in Q3FY17 due to higher debt market capital gains booked in FY2018e. The decline is in line with its guidance.
o Share of ULIPs rise; protection business stable at 5%: Average size/policy was up 22% y-o-y to Rs 60,688 likely due to increase in share of ULIPs (40% in 9MFY18, 37% in 1HFY18 and 32% in 9MFY17). Share of participating policies declined to 47% in 9MFY18 from 49% in 1HFY18 and 54% in 9MFY17. Share of protection business was 5% in 9MFY18 and 1HFY18, higher than 4% in 9MFY17.
o Business from Axis down y-o-y: Agents were up 6% y-o-y. Share of proprietary channels (largely agency) was 30% in Q3FY18, 30% in Q2FY18 and 32% in Q3FY17. Axis’s share was 56% in 9MFY18, higher than 53% in 1HFY18 and 57% in 9MFY17. Share of other banks (Yes and Laxmi Vilas) was 13% in 9MFY18, 14% in 1HFY18 and 10% in 1HFY17.
Strategic developments will drive stock performance
The current Max-Axis arrangement is valid until FY2021e. Concerns on continuity of this agreement beyond the agreed timeframe and increase in bancassurance partners of Axis including its own foray have significantly affected Max FS’s stock performance over the past few months. Max Life is working on adding new partners, possible acquisition of other life insurance company(s), step up agency and other channels to reduce its dependence on Axis Bank. We continue to believe in the value of franchise of Max Life – a high quality traditional business that has ensured low overruns, higher profitability and increasing share of protection business that will continue to buoy margins. We believe that Max Life and other private insurers play a significant role in facilitating business through the banking channel. Max Life is the only large player which has successfully facilitated the high-commission traditional business through the banking channel while most other players have focused largely on ULIPs that have lower commissions — this makes a strong case for Max as a preferred insurance partner for a bank. We expect Max Life to deliver about 20% medium-term operating RoEV (stable between FY2017-20E). Key drivers are (i)18-20% NBV growth and (ii) 19% NBAP margin. While strong business tailwinds provide a boost, we are conservatively not building in any positive operating variance in our forecasts; this provides upside bias to our estimates. Our fair value of Max Life, on appraisal value basis, Rs 300 bn, translates to 3X EV juxtaposed with 20% operating RoEV and 19% NBV CAGR between FY2017-20e. Our March 2020E-based fair value estimate for Max FS is Rs 700/share for 68% stake in Max Life; we apply 10% holding company discount.
Capital issuance of Rs 50 bn proposed
Max FS proposes to raise capital of up to Rs 50 bn which can be infused in Max Life for exploring inorganic opportunities. It is not clear if Mitsui Sumitomo will contribute proportionately to retain its stake. News reports indicate that PSU bank-promoted life insurance companies are on the block. Capital issuance of Rs 50 bn at current market price will lead to 35% dilution. Our fair value estimate of the Max FS, in this scenario, will be Rs 650/share i.e. Rs 509/share (based on diluted base of Rs 361 mn) for life insurance business and Rs 138/share as 1X cash. We are not taking cognisance of the capital issuance in our price target.