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Robust Q4 growth; FY21 was a year of margin re-set

* Max Life (MAXL) reported robust growth of ~35.8% yoy in APE to Rs19.4bn (against our estimate of Rs14bn) during Q4FY21 as company witnessed a sharp surge in retail demand. VNB grew ~43.6% yoy to Rs4.6bn. Although the company benefited from the low base of last year, overall growth trajectory remained robust in Q4FY21.

* VNB margins declined to ~23.7% in Q4 from ~25.9% in 9MFY21 as the portfolio mix shifted to ULIP products, with the share of protection falling to ~14% from ~16% last quarter. Management intends to re-prize protection plans (~5-10% hike implemented in Apr’21) to support margins, and also increase the share of savings and protection products in the overall mix.

* Though we are witnessing some hiccups on the growth front for most insurance companies due to partial lockdowns amid the second Covid wave, with its diverse product portfolio and strong distribution channel, MAXL should be able to ramp up sales in the coming months. The tie-up with Axis Bank and Yes Bank to boost the bancassurance channel.

* We increase FY22/23 APE estimates for MAXL by ~17.3%/23.4% while trimming VNB margin assumptions to 26.1%/26.4%. We continue to like MAXL for its diversified product profile, aggressive growth strategy and healthy margins. We retain Buy/OW in EAP, with a revised TP of Rs1,145 (Rs830 earlier), based on 2.3x Mar’23E 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 should 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 ~26.4% by FY23E from ~25.2% in FY21.

Axis Bank becoming co-promoter provides comfort; focus on improving distribution mix:

Axis Bank entities have become the Co-Promoter of Max Life with a 12.99% stake, along with the right to acquire an additional 7%. Axis has filed application with the IRDAI for acquiring the residual stake of ~5.17% from MSI in Max Life and the transaction is expected to complete by Q2FY22. Thus, the share of Axis Bank would be ~20% vs. ~18% as per previous filings. However, in order to reduce its over-dependence on bancassurance, MAXL is ramping up its agency network through an agency-light model and is looking at other distribution channels as well.

Outlook and valuation:

Considering a gradual shift toward more profitable product mix and relatively comfortable valuations, we continue to like Max Life. We increase FY22/23 APE estimates for MAXL by ~17.3%/23.4% while trimming VNB margin assumptions to 26.1%/26.4%. We retain Buy and OW stance in EAP, with a revised TP of Rs1,145 (2.3x Mar’23E EV).

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