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H1FY22: on the right track; reiterate Buy

Max Financial posted a good show in H1FY22, with robust operational performance by the operating company, Max Life, which delivered 19% APE growth and 24% VNB growth amid a challenging operating environment in the face of a severe Covid-19 second wave. On the nonoperational front (MAXF-Max Life merger, purchase of ~5.2% stake in Max Life by MAXF from Mitsui Sumitomo and up to 7% additional stake transfer to Axis Bank group), the status was broadly unchanged from Q1FY22. Overall, the robust H1 performance, especially in the context of a relatively stronger base, reinforces our belief in the long-term profitable growth potential of Max Life. Any material progress on the non-operational aspects could be the next big trigger for MAXF shares.

* Max Life delivers robust operational and financial performance: The sole operating company of Max Financial, Max Life, posted an overall good set of numbers in H1FY22, even in the face of a severe Covid-19 second wave. H1FY22 VNB increased by 24% YoY to Rs5.46bn, driven by a 19% YoY increase in APE and a 110bps increase in VNB margins to 25.3%. The Embedded Value (EV) grew by ~9.7% from FY21 closing EV to Rs130bn, impacted negatively by Covid-19 excess mortality and supported by favorable economic and investment variances. Operational parameters, such as persistency and cost, were broadly stable or slightly improved. The company has maintained Rs2.35bn (same as Q1FY22) of Covid-19 related excess reserves.

* Outlook remains positive: The relatively higher base and supply-side conservatism in the protection business led to Max Life reporting slightly softer growth in APE in H1 vs. peers. However, ~11% growth on a 2-year CAGR basis is among the best in the sector. Going forward, with an acceleration in protection sales and the proprietary and banca channels firing together, the company is likely to deliver good growth and a gradual expansion in margins.

* Progress on non-operational front to be the next trigger: The performance of MAXF shares has traditionally been driven by a combination of fundamental performance of Max Life and the noises around MAXF. Against this backdrop, the envisaged simplification of MAXF’s corporate structure by merging MAXF and Max Life is likely the next big trigger for MAXF shares. We believe that the merger will help remove MAXF’s valuation discount against its peers, despite its superior return profile. However, a status quo or lack of positive developments on this front could turn out to be a near-term overhang too.

* Minor changes to our estimates; reiterate Buy: Although the result was broadly in line with our expectations, we have made minor changes to our estimates to incorporate H1FY22 developments and future guidance. We have reduced our VNB margin estimates by 50bps over FY22-24E. This has resulted in a 4% and 6% decrease in absolute VNB for FY23 and FY24, and negligible changes in EV estimates.

* TP of Rs1,290 based on appraisal value method, implies a FY23E P/EV of 3.3x: We value Max Fin based on the appraisal value method, using FY23E EV and then adding discounted VNB for future years. We assume: 1) 12% cost of equity; 2) 5% terminal growth rate of VNB in FY38; 3) APE CAGR of 10% over FY23-38E, VNB CAGR of 10% over FY23-38E; 4) VNB margin (effective tax rate) of 28.2% flat from FY25; and 5) a holding company discount of 10% plus 20x FY23e Hold Co expense.

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