Buy Max Financial Services Ltd For Target Rs.2,025 by Prabhudas Liladhar Capital Ltd
Healthy growth trend; favourable mix supports margin
Q1FY27 APE grew 15% YoY led by robust growth in protection, PAR and annuity segment; we expect growth momentum to sustain in FY27E supported by continued traction in protection/annuity, increasing contribution from newer partnerships and expansion to tier 2/3 markets. Q1 VNB margin expanded to 23.2% driven by favourable yield-curve movement and higher protection mix/operating leverage. We slightly tweak our APE growth estimates at 16%/17% for FY27/FY28E and retain our margin estimates at 25.0%/ 25.1% for FY27/ FY28E. We value MAXF using the Appraisal Value framework with an unchanged multiple of 1.9x FY28E P/EV and TP of INR2,025. Reiterate ‘BUY’.
Growth sustains; protection and annuity remain key drivers:
Q1 APE reported a healthy growth of 15% YoY to INR19.2bn, led by PAR (+48% YoY), protection (+44% YoY) and annuity (+116% YoY) segments. NPAR declined 41% YoY on a high base; company expects growth to recover in subsequent quarters. Growth in annuity was driven by successful product launches in Q3FY26 and a favourable base, while the newly launched product - Smart Rise is expected to provide an additional growth catalyst in the coming quarters. Management reiterated its focus on sustaining growth in the protection and annuity segments. PAR/ NPAR/ ULIP/ Protection/ Annuity comprise 15%/ 14%/ 34%/ 25%/ 12% of Q1 APE. We build an APE growth of 16%/17% in FY27/FY28E driven by sustained momentum in protection, annuity and recovery in NPAR.
VNB margin expands; favourable mix to support sustainability:
Q1 VNB saw a robust growth of 33% YoY to INR4.4bn while VNB margin expanded ~315bps YoY to 23.2% driven by a favourable movement in yield curve (~70%) and higher protection mix/operating leverage (~30%). The expansion in margin offset the adverse impact of GST exemption, with no meaningful residual impact expected going forward. While the lower yield curve in Q2 is likely to reverse part of the benefit, management remains confident of sustaining the margin profile through FY27. Proprietary business continues to carry a higher margin than the company average, while the increasing contribution from protection and annuity is likely to support VNB growth. Given the broadly similar margin profile of annuity and NPAR, the decline in NPAR had limited impact on the overall margin. We retain our estimate of FY27/ FY28E VNB margin at 25.0%/ 25.1% as the share of protection and annuity increases.
Operating leverage improves; capital position comfortable:
Q1 total cost ratio improved to 16.0% (vs. 17.8% YoY) led by higher channel productivity. The company implemented cost-control measures following the GST changes, providing incremental support to operating efficiency. Embedded value grew 15% YoY to INR304.1bn while operating RoEV stood at 14.9%. While longer term persistency continued to improve, 13M persistency dropped to 83% for 2MFY27 (vs. 86% for 2MFY26) due to the residual impact of a specific product variant which was discontinued in March; management expects the cohort to normalize over the coming quarters. AUM grew 11% YoY to INR2,026.2bn with solvency comfortable at 198% aided by Axis Bank’s additional 0.98% stake acquisition for INR3.8bn. While the bank is keen on increasing its stake to 30%, management sees no specific need for raising capital over the next 2-3 quarters.
Tier 2/3 expansion to drive channel growth:
Proprietary and partnership channels contributed 47% and 53% respectively to Q1 APE. Proprietary growth remained healthy at 15% YoY, with online and offline businesses grew 27%/9% YoY in Q1FY27. Partnership channel grew 16% YoY, driven by 14% YoY growth in Axis Bank and 21% YoY growth across other partners, highlighting increasing diversification beyond Axis. Commentary highlighted ~45% of group credit business is sourced from partnerships added over the past three years. Further, ~65% of customers are from Tier 2/3 markets with healthy traction across both digital and traditional channels. We believe the increasing contribution from newer banca partners and expansion in tier 2/3 markets is likely to provide a meaningful runway for proprietary and partnership-led growth.
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