Neutral MAX Financial Services Ltd For Target Rs.1,180 by Motilal Oswal Financial Services Ltd
Strong APE growth driven by 19% growth in NOP
* MAX Financial Services (MAXF) reported a steady performance in 3QFY25. The new business APE rose 17.4% YoY (in line) to INR21.1b. For 9MFY25, it came in at INR57.3b, up 26% YoY.
* MAXF reported a flat VNB growth on a YoY basis (in line) at INR 4.9b. VNB margin contracted ~400bp YoY to 23.2% (MOFSLe: 23.5%), mainly due to the shift in product mix towards ULIP and the impact of surrender charges.
* Shareholders PAT for the quarter declined 54% YoY to INR0.7b (56% miss). For 9MFY25, it reported a PAT of INR3.7b, down 11% YoY.
* For FY25, management has guided for 20% growth in overall sales and higher single-digit growth in absolute VNB. The margin is likely to be at ~25%.
* The higher share of ULIP has led to margin contraction. However, management has guided to reduce the share of ULIP to 35-40% from 44% currently. We broadly maintain our estimates. Reiterate Neutral with a TP of INR1,180, premised on 2.1x Sept’26E EV and a holding company discount of 20%.
Higher ULIP share and surrender charges lead to a dip in VNB margin
* Gross premium income grew 12.7% YoY to INR82.2b (in line). For 9MFY25, it came in at INR213.6b, up 14% YoY. Renewal premium grew 13.3% YoY to INR52.2b (in line).
* The increase in rider penetration and selling variants with higher margins led to a lower-end impact of the surrender charges. However, the margin contracted 400bp YoY due to the ~100bp impact of surrender charges regulation and ~300bp impact of product mix shift towards ULIP and lower sales in the Par and Non-par segments.
* The policyholder expense to GWP rose 13bp YoY to 14.9% in 9MFY25.
* Persistency on the NOP basis improved across the cohorts, particularly in the 25th-month persistency, at 72% (up 250bp). Management expects the 25th-month persistency ratio to further increase.
* On the product front, ULIPs reported an exponential growth of 70%/49% YoY (9M/3Q basis), fueled by the newly launched Sustainable Wealth 50 Index Fund tailored for e-commerce customers. MAXF recently launched Smart Term Plan Plus to further fortify the protection & health segment.
* On the distribution side, Banca/Proprietary channels grew 14%/41% YoY (on a 9M basis). The surge in proprietary business was aided by: 1) > 100% YoY growth in the online channel, 2) 26% YoY growth in direct selling, and 3) 21% YoY growth in the agency channel. The slow growth in the banca channel was due to slower growth from the Axis Bank channel vs. other banks. However, management expects this to pick up in the coming quarters.
* AUM grew 20.4% YoY to INR1.72t.
Highlights from the management commentary
* The strategies for product mix rebalancing as stated are: 1) customer centricity, 2) improving the market share, and 3) focusing on profitability. Management guided product mix rebalancing by reducing the share of the ULIP segment in the mix by ~5-7 % and increasing the share of the non-par segment.
* The merger with the Axis Group will further lead to improved penetration in the tier 2 and tier 3 cities. This will lead to a 1.5x surge in the number of policies.
* All actions regarding pricing as well as negotiations with the distributors have been done. Management guides no further near-term repricing actions to be taken.
Valuation and view
* MAXF reported a steady performance in 3QFY25 with APE/VNB being in line. The company posted strong growth in the proprietary channel driven by secular growth within online sales, agency, and direct selling. On the product front, ULIP reported a robust growth of 49% in 3QFY25 and the share in the product mix improved to 44%.
* Actions such as an increase in rider penetration and selling variants with higher margins led to a lower-end impact of the surrender charges. However, the margin contracted 400bp YoY due to the product mix shift towards ULIP and surrender charges regulation. Reiterate Neutral rating with a TP of INR 1,180, premised on 2.1x Sept’26E EV and a holding company discount of 20%.
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