Product diversity to drive margins
* MAX Life (MAXL) reported a 2.8% fall in APE (lower than peers) to Rs6.6bn, whereas VNB declined by ~15.7% yoy. The performance was relatively better than most peers and in sync with monthly data trends. Renewals grew at a slower pace of ~6% yoy to Rs18.5bn.
* VNB margins disappointed, falling 250bps yoy to 17.1%, as a rise in reinsurance charges was absorbed by MAXL in order to maintain growth momentum. However, it has introduced new products at increased prices, supporting margins and profitability going ahead.
* Management remains firm over the rising share of protection plans with an increasing focus on a proprietary channel of distribution (~37% of distribution). With Axis Bank acquiring a 30% stake in the insurance company, product diversification is likely to sail through more comfortably. Axis’ share in total bancassurance remains healthy at ~56%.
* We are building in improvement in the margin profile for MAXL, with a gradual rise in the share of protection plans. We continue to like MAXL for its diversified product profile and comfortable valuations. We introduce FY23 estimates and roll forward to Sept’22E. We retain Buy and OW in EAP, with a revised TP of Rs660 (1.2x Sept’22E EV).
VNB margin to improve with diversity in products:
Buoyant capital markets, increased focus on linked products and targeting the underpenetrated high-margin protection segment will enable MAXL to make its product profile balanced, with non-par growing faster than the par segment. We expect margins to improve further with the rising share of protection plans. We expect VNB margins to improve to ~23.1% by FY23E against ~21.6% in FY20E.
Operating leverage kicking in, supporting profitability further:
The operating leverage during the quarter was fairly encouraging, with the opex-to-GWP ratio improving ~243bps yoy to ~16.2%. As the company is becoming more digitally equipped, we do expect the improving trend to sustain for longer.
Overhang of Axis Bank stake purchase easing; focus on improving distribution mix:
With Axis Bank acquiring a 30% stake in Max Life, the major overhang over the distribution model has been resolved by the company. However, 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.
Outlook and valuation:
Through a gradual shift toward profitable product mix and relatively comfortable valuations, we maintain the Buy rating (OW in Insurance EAP) and revised the TP to 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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