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Axis deal to enhance capital ratio by ~40% points

Result Highlights (See “Our View” below for elaboration and insight)

* VNB margin: Calculated VNB margin for 1QFY24 fell -815bps QoQ but rose 108bps YoY to 22.2%

* VNB growth: VNB de-growth/growth was at -67.9%/16% QoQ/YoY where the YoY growth was driven by the growth in APE and VNB margin expansion

* APE growth: New business APE de-grew/grew by -56.1%/10.3% QoQ/YoY, driven higher YoY by growth in Indi. Protection and Non-Par savings

* Expense control: Expense ratio grew 337bps/83bps QoQ/YoY to 24.8%, QoQ driven by increase of 394bps in Opex ratio

* Persistency: 37th month ratio was flat QoQ and YoY at 61% whereas 61st month ratio was flat QoQ but grew 100 bps YoY to 51%

Our view – Axis deal to enhance capital ratio by ~40% points

Bancassurance channel was subdued but is poised to bounce back: There was a 2% decline in the banca channel YoY. The Axis Bank channel has been a bit subdued but the company has not lost any counter share on the same. The expectation is that an improvement on this platform will transpire from the current month itself. The proprietary channel, which consists of both online and offline channels, picked up the slack and was up 23% YoY

On a YoY basis, the Non-Par Savings and Protection segments have seen the healthiest traction: Non-Par Savings is up on 57% on YoY basis. Max Life has attempted to rebalance towards Par, with the launch of a new product in June, SWAG Par, which has proved to be successful. Retail protection ramped up 36% YoY driven by renewed interest and building under-writing capacity. Annuities APE has jumped as much as 260% YoY. Management guided that they would aiming to hit double digit growth in FY24 and plan for 20% plus growth over the long-term.

While product mix evolved positively on YoY basis, high opex prevented margin from being as robust as it would have otherwise been: The margin was not as healthy mainly because of the company’s new initiatives and new capacity installation and the company reporting on actual cost whereas sales was low this quarter. While some opex drag on margin will remain, its impact will reduce as operating leverage plays out.

We maintain ‘BUY’ rating on MAXF with a revised price target of Rs 1075: We value Max Life (MLI) at 2.3x FY25 P/EV for an FY24E/25E/26E RoEV profile of 20.9/20.8/20.4%% and then apply a 20% holding company discount. We had resisted covering MAXF for an extended period of time and then initiated coverage on it in our report dated 4 th December 2022 after we felt the negatives were more than priced in.

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