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In-line performance; Axis group raises stake to 19%

RoEV to sustain above 20%

* MAX Financial Services (MAXLIFE) reported a healthy performance in 1QFY24 with APE/VNB growth of 10%/16% YoY, while VNB margins came in at 22.2%. The performance was broadly in line with our estimates.

* In 1QFY24, all products demonstrated a YoY growth, except for ULIPs, which declined 27% YoY (down 56% QoQ). Retail protection was up 26% YoY/down 23% QoQ. Group protection grew 10% YoY/ 36% QoQ. Total protection increased 16% YoY, while PAR business grew 10% YoY. Non-par savings rose 55% YoY (down 71% QoQ)

* We estimate a 14% APE CAGR over FY23-25, thus driving 10% VNB CAGR over FY23-25E. We reiterate our Neutral stance with a revised TP of INR900, premised on 2.0x Mar’25E EV and a holding company discount of 20%.

VNB margins improved YoY at ~22.2%; persistency trends stable

* Gross written premium grew ~19% YoY (9% beat) in 1QFY24. New business premium increased 25% YoY, led by strong growth across product categories. Renewal premium grew 15% YoY (in line). Shareholders PAT (pre-tax) rose 13% YoY to INR1b (in line).

* On a YoY basis, the business mix moved in favor of Non-par savings with a 38% share (vs. 27%), while that of ULIPs declined to 25% from 38%.

* Absolute VNB grew 16% YoY to INR2.5b (in line), while VNB margins came in healthy at 22.2% in 1QFY24 (up 100bp YoY). AUM grew ~21% YoY to INR1.3t.

* On the distribution side, Banca APE was down 2% YoY, while Proprietary Channels witnessed a strong growth of 23% YoY.

* 13th/61st month persistency was broadly steady at 84%/51%, while other cohorts were also steady.

* On the cost front, the opex-to-GWP ratio increased 51bp YoY to 17.4%.

* Pursuant to the approval of the MFSL and Max Life boards, Axis Bank will infuse INR16.1b by subscribing to 142.6m equity shares of Max Life at a fair market value INR113.06 per share (determined based on DCF methodology). Upon the completion of the proposed infusion, Axis entities will collectively hold 19.02% of the equity share capital of Max Life.

Highlights from the management commentary

* After the Axis Bank deal, the solvency margin is expected to increase by 39%, providing ample capital for future growth. Although growth has been muted within the Axis Bank channel, the counter share has not declined for Max Life.

* Focus will be on protection and annuity, where capital requirement is higher than other products.

* Protection growth has been strong on the back of 1) a favorable low base effect, 2) an upswing in demand 3) enhancements in the supply side, facilitated by renegotiations with reinsurance partners. This has granted flexibility regarding sum assured and the ability to underwrite diverse cohorts.

Valuation and view

MAXLIFE reported a healthy trend in total APE, driven by strong traction in all segments, except ULIPs. Overall the share of ULIPs moderated, while the mix of Non-PAR improved. We expect the share of Non-Par to moderate going ahead. The Banca channel witnessed a muted performance, while the proprietary channel maintained strong trends. VNB margin remained healthy at 22.2%, led by improved product profitability. Persistency trends were stable. Importantly, a key concern has been addressed with Axis Bank’s proposition to raise its stake in Max Life to 19% through a primary transaction. This will support the solvency, which stood at 188% in 1QFY24. We estimate 13% APE CAGR over FY23-25, thus driving 10% VNB CAGR. We reiterate our Neutral stance with a revised TP of INR900 premised on 2.0x Mar’25E EV and a holding company discount of 20%.

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