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Growth momentum to continue; maintain Buy
* New business premium (NBP) grew 25.9% yoy to Rs11.4bn in Q2FY19 (+49.1% qoq), ahead of Emkay estimate of Rs10.9bn. Annualized premium equivalent (APE) of Rs8.6bn was up 28.2% yoy and 54% qoq. Gross written premium (GWP) grew 17.8% yoy to Rs33bn, driven by strong renewals and improved persistency trends. There was a 200bps yoy improvement in 13th month persistency to 84%.
* MAXL reported value of new business (VNB) margin of 20.4% (+230bps qoq) vs. Emkay estimate of 19.1% (+130bps). Return on embedded value (ROEV) improved 350bps qoq to 18.5% on positive operating variance stemming from improved persistency trends, favorable demography, and better expense management.
* In line with its strategy of growing its proprietary channel (33% growth in 1H19 vs. 21% growth in the Bancassurance channel), it has entered into a strategic knowledge partnership with New York Life (included in its opex budget of Rs1.2bn).
* MAXL targets to gradually move to an optimal product mix. It aims to achieve 40-41% share of ULIPs, increase the share of non-par to 20-25% with higher contribution from the protection segment, and restrict the share of par to ~35%. We have factored in a 210bps VNB margin improvement in FY18-FY21E to 22.3%. About 60-70% of the margin improvement is expected to come from the higher share of protection, while the remaining from improved operational efficiencies. We have rolled forward our earnings to FY21. We are maintaining our Buy rating, with a TP of Rs615 at 1.6x Sep’20EV.
* Embedded value (EV) walk-down
MAXL reported an ROEV of 18.5% (+170bps yoy) on a positive operating variance of Rs420mn, thanks to improved persistency trends (Rs220mn), favorable demography (Rs100mn), and better expense management (Rs130mn). Unwinding of 9.2% (annualized) in 1H19 was below 9.7% in FY18; however, management expects it to improve to 9.5% by FY19. Non-operating variance led to a negative impact of Rs1.5bn, mainly driven by equity and interest rates movements.
* Profits beat on one-off MAXL reported a PBT of Rs1.85bn (+41.8% yoy) vs. our estimate of Rs1.13bn, supported by investment income, gain from better yields, and a one-off item of Rs500mn stemming from the reserves realignment in the non-par segment. Group PBT stood at Rs1.8bn (+61.9% yoy). Reflecting this, we have adjusted our estimates and have raised our FY19E EPS by 6.5%.
* Maintaining Buy
We expect APE to record a 17.9% CAGR over FY18-21E, with protection growing faster at 42.9%. We have factored in a 210bps VNB margin improvement over FY18-FY21E to 22.3%. About 60-70% of this margin improvement is expected to come from the higher share of protection, while the remaining from improved operational efficiencies. We have rolled forward our earnings to FY21E, maintaining our Buy rating with a TP of Rs615 at 1.6x Sep’20EV after applying a 20% holding company discount and taking into account the 70.8% stake in MAXL.
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