Published on 3/12/2021 11:59:45 AM | Source: Motilal Oswal Financial Services Ltd

Investment Idea - Buy Max Financial Services Ltd For Target Rs.1,250 - Motilal Oswal

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Growth to pick up over FY21-26; margin trajectory stable

Protection and Retirement to be the key focus areas; to grow the proprietary channels

We hosted an investor day for Max Life Insurance. The company was represented by MD and CEO Mr. Prashant Tripathy, CFO Mr. Amrit Singh, and other members of the senior management team. The management highlighted the progress that it has made over the past years and how it is positioned to capitalize on the exciting opportunities that lie in this space. The areas of discussion ranged around: a) future outlook and strategic roadmap, b) innovation in customer segments and building distribution for the future, c) pervasive intelligence and automation across the enterprise, and d) strategic risk management. Below are the key takeaways.


Growth to pick up (by more than 20% over FY21-26); margin trajectory broadly stable

The past few years have been challenging for Max Life, with the management’s focus on simplifying the organization structure. Going forward, its primary focus would be on delivering superior growth (more than 20% over FY21-26E), with margin remaining range bound. It expects RoEV to remain similar to FY21 levels (18.5%). Growth would be led by a key focus on:

* Leader in online acquisition: It is looking to increase sales by 7-9x over the next five years.

* Fastest growing and profitable proprietary distribution: The management’s focus is on ramping up its own proprietary channel, with an aim to improve profitability and productivity. It is looking to increase sales by 2.5x over the next five years and be among the top three.

* Leader in Protection and health and wellness: Its focus will be on providing Health Insurance as a rider. It is looking to increase sales by 3-4x over the next five years and to be among the top three.

* Leader in Retirement: It recently received approval for NPS management and is looking to scale up the business and strengthen its presence. It is looking to increase sales by 8-9x over the next five years and be among the top three.

* Inorganic expansion: The management is open to strategic inorganic opportunities, which would strengthen its existing franchise. It is looking at least one-to-two such opportunities over the next five years.


Protection and Retirement to be the key focus areas

The management aims to cater to the savings, mortality and morbidity, and the longevity needs of customers, thus cover the entire customer lifecycle. Long term structural opportunities exist, with a primary focus on the Protection and Retirement segment as the Protection gap remains large (Protection policies constitute 35% v/s 10% five years back, with the online channel forming over 40%). On the Retirement side, the need for pension products is likely to increase (total opportunity to increase to INR118t from INR28t by CY50) due to changes in demographics, emergence of nuclear families, and advancement of Healthcare facilities, thus providing robust growth opportunities.


Aims to scale up the proprietary online and offline channels for future generations

Max Life has been at the forefront of driving product innovation by launching various firsts in the industry. Going forward, it would continue to work on building a strong distribution channel on three fronts namely:

* Proprietary online: With an aim to be a leader in the Savings and Protection business. In FY21, ~16% of the customers were acquired online.

* Proprietary offline: With an aim to be the fastest growing profitable proprietary channel. It grew at 17% CAGR over the past five years.

* Partnerships: Strategic partnership with deeper integration to deliver superior growth.

At present, ~65% of its customers are millennial (below 40 years), with 8% being Gen Z (below 25 years). Gen Z and millennials prefer the online mode, which is contributing the bulk of the sales. This customer segment offers a healthy proposition as acquiring customers at an early age allows the company to grow with them as they move upward in their lifecycle. Agent/recruiter productivity stands at over INR0.11m/INR0.2m.


Strong focus on cross-sell; aspires to be a leading digital first insurer

The company has developed and deployed analytics at every stage of the business: new business, purchase and issuance, and servicing, retention, and claims, with multiple partnerships with the InsurTech ecosystem to accelerate its digital journey. The management’s focus is on using AI built technology to move 70% of its workload to the Cloud by FY24. Agency channels are enabled with digital assets to reduce the on boarding time for agents by 50%. Its focus remains on cross selling by building digital integration, which has improved to 31% in FY21 v/s 27% in FY20. Its overall goal is to be a leading digital first Life Insurer over the next 12-18 months.


High focus on risk management; governance remains strong

Max Life follows a three line defense model – management risk committee, risk Ethics and ALM committee, and Board of Directors – with independent and experienced functionaries to manage risks. It has further segregated its investment sub-offices to manage investment risk, and follows an active risk management framework to oversee the various aspects such as mortality and persistency risk, interest risk, etc. The presence of an actuary on the board, with a standalone board committee for reviewing actuarial matter, further strengthens governance, while following the principle of prudence to manage risks.


Valuation and view

It expects growth to pick up over the next five years, which is likely to be better than the past five years. Growth via the proprietary channel is likely to remain strong, while banca will continue to deliver healthy growth. Persistency trends have improved, while cost ratios should remain modest. We estimate 21% APE CAGR over FY21-24E, with VNB margin sustaining at 25-26%. This would enable 24% VNB CAGR over FY21-24E, while operating RoEV would sustain ~22%. We maintain our Buy rating with an unchanged TP of INR1,250 per share (3.6x Sep'23E EV with a 20% holding company discount).



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