Buy Max Financial Services Ltd For Target Rs.718 - HDFC Securities
We believe, over a long term period, India’s highly underpenetrated life insurance space is attractively positioned to capture the huge growth opportunity. Large private players are in better placed to take advantage given their ability to push protection business by leveraging strong brand and existing network. They have access to adequate capital and can invest in online platforms. Also, insurance industry’s inherent nature of long gestation period to break-even (9-10 years) and need for bancassurance partnership provides a very bleak visibility for a new entrant which in turn is extremely positive for well-established larger bancassurance players. We feel that COVID19 situation could be blessing in disguise over the medium term for the industry as it will create renewed push for insurance coverage by Government and increase need for coverage felt by the general public.
A strategic partnership with Axis Bank provides long term distribution capability, ending uncertainty and market anxiety over the future of Max Life (MAXL) and Axis Bank’s distribution arrangement. A diversified product portfolio and strong distribution reach has made MAXL fourth largest private life insurance player in India. Given the strong brand, leadership and tailwinds on the back of financialisation of savings, we remain optimistic on the future growth of the company.
Valuations and Recommendations:
Despite a difficult environment, MAXL delivered decent growth in H1FY21. A significant share of Non PAR savings in the mix drove margin higher by 320/710bps YoY/QoQ to 24.2% in H1FY21. We expect the margins to moderate in H2. We expect the company to deliver 4.2% CAGR for New Business Premium (NBP) and 6.5% CAGR for Value of New Business (VNB) over FY19 to FY22E. Embedded Value (EV) is estimated to grow by 13.8% CAGR over same time frame. The recent run-up in the equity and bond markets should aid in higher positive economic variance leading to a high EV growth in FY21E. Despite significant price appreciation from recent lows, it is still trading at significant discount to other peers like HDFC Life, ICICI Pru and SBI Life. For FY22E the company is trading at 2.4x Embedded Value.
Post the proposed restructuring of shareholding in Max Life and Max Financial, we think the holding company discount while valuing Max Financial will narrow and also lead to lower Holding company expenses. The agreement with Axis Bank will remove uncertainties on distribution side.
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