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Well-positioned for profitable growth despite temporary ‘noises’

We hosted Max Financial Services’ top management in Mumbai on June 7, 2022 for meetings with DIIs to discuss the company’s business performance and growth trajectory, as well as investor concerns. Mr. Prashant Tripathy, CEO of Max Life, and Mr. Amrit Singh, CFO, were present. The key highlights: 1) the plan to simplify the corporate structure is on track and updates from the regulator’s end are awaited; 2) the promoter is working on plans to reduce the pledge on MAXF shares; 3) Max Life’s share in the Axis Bank channel should improve and stabilize in FY23; and 4) overall medium-term APE and VNB growth of above 20% remains an achievable target.

* Corporate structure simplification ongoing: The simplification of the corporate structure has been one of the stated objectives of MAXF management. It will be a 3-step process: 1. MAXF buying a 5% stake in Max Life from Mitsui Sumitomo; 2. MAXF transferring a 7% stake in Max Life to Axis Bank subsidiaries; and 3. after the completion of Step 1 and 2, approaching regulators for the merger of Max Life and Max Financial, or any other way to bring the life insurance company at the listed level. Currently, the company’s application for the approval of Step 1 is with the IRDAI, and management is hopeful that the approval will come soon.

* The promoter is committed to bringing down pledge level: The high pledge of promoter’s holding in MAXF has been one of the key investor concerns. As per the latest filing, 13.46%, out of the 14.72% of promoter’s stake in MAXF, is pledged. This translates to about 91% pledge levels, a material increase from 64% as of Dec-21. The recent increase in pledge has largely been an outcome of the fall in share price (~25% fall between Dec-21 and May-22) without any significant change to the promoter’s debt level, which remains stable. The promoter has acknowledged the concerns about the high pledge of MAXF shares and is working on plans to bring it down by monetizing some of his assets outside MAXF. It is worth noting that the current debt levels at the promoter level is much lower than what it was a few years back when the share pledge issue was at the forefront.

* Counter share and growth in the Axis Bank channel to normalize in H2 as base effects kick in: When Bajaj Allianz also joined the Axis Bank distribution channel, it started to dent Max Life’s counter share in the channel. This was a natural outcome of a notable private life insurance company partnering with a large retail bank and aggressively deploying workforce in bank branches, similar to what happened at HDFC Bank when it went for an open architecture. With Bajaj Life’s impact going into the base and the Axis Bank channel growing strongly, Max Life’s counter share and growth in the channel should recover and stabilize at a higher level than what was seen in FY22

* To pursue profitable growth: In the last five years, despite 2 years being disrupted by Covid19, Max Life has delivered solid EV and VNB growth rates of 20% and 24%, respectively. Management reiterated its commitment to deliver profitable growth in the medium- to long term. Due to the changing competitive landscape, the company is prioritizing growth over profitability, and has guided for a slightly lower VNB margin in FY23 than 27.4% in FY22. However, the company is confident of delivering ~16-18% VNB growth, driven by APE growth.

* Proprietary distribution channels and retirement & protection products form the core of growth strategy: The company will continue to augment and expand its agency channel to accelerate growth and profitability. The growth of the agency channel will be higher than that of the banca channel in the coming years, and this should lead to a gradual increase in agency channel share in the distribution mix. On the product front, retirement (pensions and annuity) and retail protection will be the focus areas for the company.

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