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Assigned BUY for the first time in Dec 2022, MFSL showcases required positive outcomes

Our view – Robust APE growth coupled with reasonable margin control

VNB margin –Max Life displays material sequential expansion driven by seasonality and rider attachment: Calculated VNB margin for 2QFY25 rose 613bps QoQ to 23.6%. About 500 bps of the sequential margin expansion is attributable to operating leverage and seasonal aspects, while about 100 bps is attributable to healthy rider attachment. At the beginning of the year, the company had guided for a 25-26% VNB margin for FY25 with a likelihood to settle at the lower end of this range. Upon the announcement of surrender guidelines, the company guided that there would be a negative impact of 100-200 bps on VNB margin on a run rate basis. Hence, the guidance for VNB margin for full year FY25 is 23-24%.

APE growth – Max Life continued to demonstrate stellar growth outcomes driven by its proprietary channel: New business APE grew by 49.3%/31.3% QoQ/YoY, driven higher YoY by growth in Individual Protection, Non Par Savings and ULIP segments. Proprietary channel APE was at Rs 9.41 bn in 2QFY25, up 45% YoY, driven by growth in Agency, E-commerce and Cross sell. Online Proprietary channel (E-commerce) APE grew by 59% YoY in 2Q. About 1.5 years ago, the company had entered the online savings segment, where they were previously not present, which has driven the growth in online savings. Offline Proprietary channel (Direct Sales) APE grew by up 39% YoY. The direct sales channel is being driven by selling to new customer pools including cross sell and upsell, including to Axis Bank franchise customers.

 We maintain ‘BUY’ rating on MAXF with a revised price target of Rs 1550:  We value Max Life (MLI) at 2.8x FY26 P/EV for an FY25/26/27E RoEV profile of 20.2/19.7/19.5% and then apply a 20% holding company discount. We had deliberately kept MAXF on “NOT RATED” for an extended period and then initiated coverage in our report dated 4th December 2022 after we felt that the negatives were priced in.

(See Comprehensive con call takeaways on page 2 for significant incremental colour.)   

Other Highlights (See “Our View” above for elaboration and insight)

? VNB growth: VNB grew 101.7%/23.2% QoQ/YoY driven YoY by sharp rise in APE

? Expense control: Expense ratio fell/rose -176bps/266bps QoQ/YoY to 25.7%, QoQ driven lower by fall of -297bps in Opex ratio

? Persistency: 37th month ratio rose 200bps YoY to 64% whereas 61st month ratio was flat YoY at 58% 

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