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Growth challenges and structure simplification overhang overshadow robust margin delivery

Max Financial reported decent financial performance for H1FY23 despite the muted APE growth being known. For H1FY23, APE growth slowed to only 1.9% YoY on account of challenges in the banca channel, led by Axis Bank (APE: -7% YoY in H1FY23) and offset by the strong performance in the proprietary channel (+23% YoY). Driven by favorable product mix, VNB margin for H1 was 26.7%, which led to VNB for H1 logging at Rs5.9bn, at 5% above our estimates. On net basis, H1FY23 results were on expected lines. Key drivers for Max Financial’s shares are likely to be: 1. Return of growth in the banca channel and; 2. Tangible progress in the simplification of the corporate structure. Reflecting developments of lower growth, better VNB margins, and impact of rising yields in H1, we have tweaked our FY23-25 estimates, leading to 10-12% reduction in VNB estimates and 5-6% reduction in EV estimates. We reiterate our BUY rating on Max Financial with a revised Sep-23E TP of Rs930 (FY23E P/EV 2.5x).

* Good performance on VNB margin amid known sluggishness in topline growth: Max Life reported 26.7% VNB margin for H1FY23 and strong 31.3% VNB margin for Q2FY23, led by a favorable product mix with a higher proportion of non-par savings. With ongoing challenges at key banca partners (Axis Bank and Yes Bank) due to increased competitive intensity, volatile capital markets affecting ULIP demand, and weakness in the overall market for retail protection, Max Life reported 1.9% YoY APE growth in H1FY23 and a decline of 7.9% in Q2FY23. Embedded value as of H1FY23 was Rs147bn (vs. Rs141.7bn as of FY22), growing modestly on account of negative impact of Rs5.4bn from non-operating variances, driven by rising yields. Two things came as bright spots for Max Life: 1. Proprietary channel growth of 23% YoY in APE growth, which endorses the ongoing work behind strengthening these channels and; 2. 11% YoY growth in retail protection APE in Q2 and a 4% YoY decline in H1, reflecting much better retail protection developments than the market and peers. Going ahead, management is confident of acceleration in growth in banca channels post Q3FY23.

* Stable performance on key operating parameters; AUM growth impressive: On other operating parameters such as cost and persistency, Max Life reported stable performance for H1FY23. Solvency ratio in H1FY23 was 196%, flat vs. Q1, reflecting the outcome of slower growth and relatively stable bond yield in Q2FY23, indicating marginal negative MTM impact on solvency capital. AUM growth was impressive for Q2FY23 at 5.6% QoQ to Rs1.13 trillion, reflecting reasonable positive net new money flow.

* Return of growth in the banca channel and progress towards corporate structure simplification remain key: Max Financial’s shares have been languishing over the past year on account of growth slowdown, led by Axis Bank channel and the stalled (awaiting regulatory clearances) process of corporate structure simplification. In this backdrop, recent news of penalties on Max Financial and Axis Bank regarding the transaction of certain shares of Max Life has brought the focus back to simplification of the corporate structure. Any tangible progress in this direction (IRDAI approving Max Financial buying a 5.2% stake in Max Life from Mitsui Sumitomo and then Max Financial selling a 7% stake in Max Life to Axis Bank group) and return of growth in the banca channel, especially in Axis Bank, will be the key re-rating trigger for Max Financial’s shares.

* Revised estimates lower to reflect H1 developments, Reiterate BUY rating with a revised TP of Rs930: Factoring slower APE growth of 1.9% YoY in H1FY23 and a slightly better VNB margin, we have cut our APE estimates for FY23E and FY24E by 12% and 14%, respectively, and increased our VNB margin estimates by 50bps. On net basis, our VNB and EV estimates for FY23- 25E are coming down by ~10-12% and 5-6%, respectively. Using an appraisal value method for valuing Max Life and later applying a 25% holdco discount (increased from 20% to reflect the growing uncertainty over structure simplification), we arrive at Sep-23 TP of Rs930, implying a 2.5x P/EV multiple for FY23. We reiterate our Buy rating on account of attractive valuation (Currently trading at FY23E P/EV of 1.9x).

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