Pre-emptive approval of stake sale to Axis Bank?
* Change in ownership by Axis in Max Life: Axis Bank has proposed to acquire a 17% stake in Max Life from MFS, resulting in total ownership of 18%, according to a regulatory filing. As per earlier disclosures and definitive agreements between Max Financial and Axis Bank, the latter had agreed to acquire 29% of Max Life from MFS, taking its total stake in Max Life to 30%.
* Change in ownership to comply with regulatory norms; other terms remain intact: Our initial discussion with the Max Life management suggests that the change in ownership is undertaken to comply with regulatory directives (mostly from RBI) and the rest of the terms of the original contract remain intact. The share swap and a board seat for Axis Bank would remain intact in spite of the change in ownership by the bank.
* A step closer to proposed deal; we remain optimistic: Since this change has been made in consultation with the regulators, we believe that the deal should not face much resistance when they seek approval, making this investment inevitable. With the deal nearly coming through, we remain optimistic about management’s plan of bringing in product diversification.
* Beneficial for minority holders; potential re-rating likely: With Axis Bank acquiring lower than expected ownership in Max Life, minority holders of Max Financial would remain at an advantage as a major stake of the pure life insurance business will fall in their kitty. This appears to be a positive development and should lift the overhang on the stock, leading to a potential re-rating.
* Overhang of Axis deal easing; focus on improving distribution mix: With Axis Bank owning an 18% stake in Max Life, the major overhang over the distribution model has been resolved for the company. In order to reduce its over-dependence on bancassurance (contributes over 68% to individual APE), MAXL is ramping up its agency network through an agency-light model and is looking at other distribution channels.
* Risk-reward remains favorable; maintain Buy and OW stance: Through a gradual shift toward profitable product mix and relatively comfortable valuations, we retain Buy (OW in Insurance EAP) and a revised TP of Rs660 at 1.2x Sept’22E EV. We expect VNB to grow at a CAGR of 14.2% to Rs13.3bn over FY20-23E, with ROEVs at ~19.5% for FY20-FY23E.
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