Stock Update

Max Financial Services

Steady quarter, attractive valuations

Sector: Banks & Finance

Max Financial Services (MFS) posted modest numbers for Q3FY2020,
with steady business growth but moderating margin, mainly as Max
Result Update Life Insurance (MLI) continues to see higher operating expenses (due
to investment in developing own proprietary channels). Due to the
Change new changes in dividend distribution tax (DDT) and the direct tax
code (DTC), the management estimates ~60 bps impact on margins
Reco: Buy  and ~2% impact on EV. The life insurance business, MLIC saw gross
CMP: Rs. 484 written premium (GWP) rise by 10.1% y-o-y, mainly driven by rise of
16.2% y-o-y growth in first-year premium. The 13th-month persistency
Price Target: Rs. 590  ratio increased by 100 BPS y-o-y to 85% in 8MFY2020 and was
steady as on the previous quarter. MLIC has best-in-class 13th month
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persistency, which indicates good customer retention and effective
client communication. Individual annualised premium equivalent
Company details (APE) increased at a healthy pace of 16% y-o-y, while assets under
management (AUM) grew by 17.5% y-o-y. During quarter, proprietary
Market cap: Rs. 13035 cr channel growth (9M +22%; Q3 +19%) was faster than Bancassurance
(banca, 9M +20%; Q3 +14%), which we believe is a positive indication.
52-week high/low: Rs. 567/361 Value of new business (VNB) grew by 24% y-o-y, with 9MFY2020
margins at ~21%, driven by increased non-par (NPAR) contribution that
NSE volume: (No of rose by 1,400 bps y-o-y to 20%. Individual protection mix also grew by
8.0 lakh
shares) 130 BPS y-o-y to 8%. MLIC continues to have a strong bancassurance
relationship with Axis Bank. However, as Axis Bank has recently added
BSE code: 500271 a tie-up with a strong competitor and Axis’ own acquisition plan is yet
not clear, it is an overhang till clarity emerges. In the past nine months,
NSE code: MFSL MFS has on-boarded new distribution partners, including NBFCs and
corporate agents, which is positive, even though we believe a strong
Sharekhan code: MFSL bancassurance partner is very critical. Despite uncertainties, we
believe strong business fundamentals and current valuations (at a
Free float: (No of
19.3 cr
significant discount to peers) make the risk-return favourable for MFS.
shares) Therefore, we maintain our Buy rating on the stock with an unchanged
price target (PT) of Rs. 590.

Shareholding (%) Key positives

ŠŠ Increased persistency ratio (13 month) by 100 bps y-o-y to 85%,
Promoters 28.3 indicating healthy renewals in premium
ŠŠ New business margin (post cost overrun) has expanded by 60 bps
FII 29.6
y-o-y to 21.0% for the 9MFY2020 period
DII 29.7 Key negatives
Others 12.4
ŠŠ Increased opex to GWP ratio from 14.5% to 16.3% y-o-y as the
company invested in its proprietary channels
Our Call
Price chart Valuation for MFS appears attractive and is at a significant discount
600 compared to some of the listed bank-owned insurance players. We find
that there are significant long-term positives in the strong operational
525
numbers for the company. While the share pledge elevates the risk
450 profile for MFS, we believe a possible reverse merger probability will
375
be a positive and helps offset it. We maintain our Buy rating with an
unchanged PT of Rs. 590.
300
Key Risks
Oct-19
Feb-19

Feb-20
Jun-19

Lack of visibility on the Future of bancassurance tie-up with Axis Bank

Price performance Valuation Rs cr

Particulars FY19 FY20E FY21E FY22E
(%) 1m 3m 6m 12m Total Premium 14,575 16,476 19,030 21,984
New Business Premium 3,950 4,780 5,783 6,911
Absolute -15.4 18.2 15.2 27.1
VNB Margin (%) 22 21 21 21
Relative to Embedded Value 9,257 10,144 11,835 13,742
-12.1 19.1 7.0 14.9 EV / Share (Rs.) 248 271 315 366
Sensex
P / EV (x) 2.0 1.8 1.5 1.3
Sharekhan Research,
Sharekhan Research, Bloomberg
Bloomberg
Source: Company; Sharekhan estimates

February 05, 2020 16

 Stock Update
Q3FY2020 Concall highlights
ŠŠ Due to changed rules, margins may be impacted by 50-60 bps in the worst case scenario, and a 1-2%
impact might be seen on the Embedded Value.
ŠŠ Price hike in term policies – the company is reviewing and moving up prices as per competition. The
company is presently observing the market and will take decision on pricing as per the competition and
own strategy, most likely in 3 months from here.
ŠŠ Most customers are not buying policies for Section 80C benefits. But volume of customers having ticket
size above 1 Lakhs is fairly low. The company regularly surveys customers to find the reasons for buying
life insurance. Eight years ago, tax benefit topped the reasons that is no more the case and tax benefit is
considered less important by customers in buying insurance .
ŠŠ Effective Tax Rate is 11.5% (conservative tax assumption for payout), As per pre-tax profit, it is 10.65%
ŠŠ VNB margins (like to like) are lower y-o-y due to the investment on capacity building, primarily on
developing own sales channel.
ŠŠ Operating leverage will pick up gradually. Over-runs happened due to investment on developing own
channels. Will normalize in two years time.
ŠŠ If the company is writing non-PAR with lower denomination and higher duration, then persistency will be
similar to PAR persistency. Persistency on Protection is better than rest of the products.
ŠŠ Margins in Non-PAR are getting better, but they are riskier. That is why the company wants to maintain a
balanced portfolio.
ŠŠ Customer mix: Protection element of business, everyone goes for salaried customer. ~30 % of business
from protection. Rest are of mix nature, but higher salaried component is there as well.
ŠŠ Owing to seasonality, H2 Return on Embedded Value (ROEV) is better than H1.
ŠŠ MFSL has moved away from interest rate swap and forayed into forward rate agreements to cover up for
interest rate risks.
ŠŠ Margin growth was offset by shift in product mix towards non-PAR savings and investments in proprietary
channels. A combination of product mix and investment has pulled down profit growth.
ŠŠ Max life performance: Embedded value has crossed Rs.10,000 crore with MCEV at Rs.10,077crs growing
by 22% y-o-y. MCEV on operating level is growing at 18.4% annualized rate while non-operating MCEV is
at 18.7%.
ŠŠ Value of New Business grown 24% to Rs.576crs. Structural new business margin on pre over run basis has
expanded by 150bps to 24.3% and actual NBM on post over run basis has expanded by 60 bps to 21%.
ŠŠ Max Life Individual APE grown strongly with an increase in contribution from protection and non part
savings.
ŠŠ Max Life has outperformed industry growth on new sales by growing at 20% versus the private insurance
industry’s growth at ~16%, has led to an increase in market share by 30bps to 9%.
ŠŠ Proprietary channels growth is faster than bancassurance channel growth which is line with strategy. The
company aims to grow proprietary channel or outgrow third-party channel relative to proprietary channel
growth.
ŠŠ Max Life’s agency channel is one of few which delivers a positive margin i.e. its proprietary channel
margin and non-proprietary channel margin are almost similar.
ŠŠ Axis bank has deliver 18% growth and another private bank to has shown attractive new sales growth.
Overall protection sales has grown higher than company growth.
ŠŠ The company has achieved second and third rank in the 13th& 61st month persistency respectively.
ŠŠ Growth strategy: (i) Investment in proprietary channel (ii) efforts to deepen bancassurance relationship
(iii) cost management & improvement in protection mix

February 05, 2020 17

 Stock Update
Results Rs cr
Particulars Q3FY20 Q3FY19 YoY% Q2FY20 QoQ%
First year premium 999 860 16.2 1,053 -5.1
Renewal premium 2,477 2,245 10.3 2,401 3.2
Single premium 403 330 22.1 328 22.9
Gross Written Premium 3,879 3,435 12.9 3,782 2.6
Shareholders Profit (Pre Tax) 183 99 84.8 93 96.8
Individual APE 1,000 864 15.7 1,038 -3.7
Conservation ratio (%) 88.2 89.4 -120 bps 86.8 140 bps
Average case size (Rs.) 62,272 56,360 10.5 69,772 -10.7
AUM 68,618 58,397 17.5 65,425 4.9
13th Month Persistency Ratio (%) 85.0 84.0 100 bps 85 0 bps
Source: Company; Sharekhan Research

Outlook
MFS is effectively building an attractive insurance franchise characterised by a multi-channel distribution
network built upon a conservatively underwritten insurance business. Management has reiterated its strategic
guidance of 25%+ VNB growth, ~25% VNB margin and ~25% ROEVs (or a mix of 25-25-25) by FY2022. We
believe the strategy to achieve a balanced product mix and focus on non-par savings with the protection
segment will be margin-accretive and is achievable. We view that cost management, re-balancing of product
mix and further diversification of distribution channels are key levers for improving profitability levels and will
add to business sustainability. While the reverse merger plan with JV partner was terminated, MFS remains
committed to an eventual reverse merger plan, which when happens will be positive. MLIC continues to have
a strong bancassurance relationship with Axis Bank for now, even as clarity on the future of the relationship
would be key monitorable.
Valuation
Valuation for MFS appears attractive and is at a significant discount compared to some of the listed bank-
owned insurance players. We find that there are significant long-term positives in the strong operational
numbers for the company. While the share pledge elevates the risk profile for MFS, we believe a possible
reverse merger probability will be a positive and will help offset it. We maintain our Buy rating with an
unchanged PT of Rs. 590.

February 05, 2020 18

 Stock Update
About company
Max Financial Services Limited (MFS) is the Holding company (holds 71.8% share) of Max Life a private life
insurance company. Max Life (MLI) is a joint venture with Japan based partner which holds 25% share of
MLI), a global leader in life insurance. Max Life Insurance offers comprehensive long-term savings, protection
and retirement solutions through its high-quality agency distribution and multi-channel distribution partners.
The company has a strong customer-centric approach focused on advice-based sales and quality service
delivered through its superior human capital. It is the 4th largest Private Life Insurance player in India with
~10% market Share.

Investment theme
Max Financial Services hold Max Life Insurance and is among the leading private sector insurers and has
gained critical mass and enjoys the best operating parameters in the industry. Max Life had delivered strong
performance on both new and renewal business over the years. As the insurance sector is showing signs
of stability, the company’s favorable product mix and a strong distribution channel augur well and will help
sustain healthy growth in premiums and profits. Strong focus towards customer measures has helped to
deliver superior performance across parameters and will continue to remain an important differentiator.

Key Risks
Lack of visibility on the Future of bancassurance tie-up with Axis Bank

Additional Data
Key management personnel
Mr Mohit Talwar Managing Director
Mr V Krishnan Company Secretary
Mr Jatin Khanna CFO
Mr Aman Mehta Independent Director
Source: Company Website

Top 10 shareholders
Sr. No. Holder Name Holding (%)
1 MONEYLINE PORT INV LTD 6.7
2 JACKSOM NATIONAL ASSET 6.1
3 Mirae Asset Global Investments Co 5.1
4 Reliance Capital Trustee Co Ltd 5.0
5 HDFC Asset Management Co Ltd 4.9
6 Kotak Mahindra Asset Management Co 3.2
7 Baron Capital Inc 3.1
8 Aditya Birla Sun Life Asset Manage 3.0
9 ICICI Prudential Asset Management 2.5
10 GOVERNMENT PENSION FUND - GLOBAL 2.0
Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

February 05, 2020 19

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