Max Financial - Max Benefits to All - Company Update - HDFC Securities

JV with AXSB provides long term distribution capability to the business and ends uncertainty and market anxiety on the future of the current partnership. We expect dependence and hence investments in proprietary channels to reduce, thereby increasing VNB. We rate MAXF a BUY with an increased TP of Rs 560 (Mar-21E EV + 25.0x FY22E VNB).

The deal. MAXF announced its long awaited deal with Axis Bank (AXSB) for the sale of 29% in Max Life (MAXL) to AXSB; MAXL will become a 70:30 JV between MAXF and AXSB. Valuation of stake will be dependent on the tax adj. BV of MAXL (Dec-19: Rs 56bn, 29% at Rs 16bn) as on transaction date.

Value creation options. MAXF and AXSB intend to merge MAXF with MAXL, thereby directly listing MAXL. If the merger is not completed within the pre-agreed timeline, the parties have contractually agreed, among other things, to a swap up of AXSB's shareholding in MAXL to MAXF shares. The tax consequences of this possible outcome will be shared equally.

Put option: Additionally, if the above value creation options are not consummated within 63 months from the closing, Axis Bank will be provided with a put option on MAXF to sell its entire holding in MAXL at a price of Rs 294/share (Rs 169.3bn) within 9 months of exercise of such put option. This is a low probability event.

View on deal. AXSB picking up material stake in the company brings a long term stable and strong distribution channel for MAXL. This also paves way for long term synergies in the form of lower expenses at MAXL, adding to VNB. The transaction is long drawn and will require approvals from multiple government agencies such as the DEA, IRDAI, RBI, CCI, SEBI etc. Key risk: Considering that MAXF has faced such issues earlier, consummating the entire transaction will take time and part of it may not materialize.

Valuation and view. A strategic JV partner such as AXSB provides long term distribution capability, ending uncertainty and market anxiety over the future of the current AXSB partnership arrangement. We expect MAXL to lower its dependence on proprietary channels which will be VNBM accretive as investments in channels reduce. We rate MAXF a BUY with an increased TP of Rs 560 (MAXL: Mar-21E EV + 25.0x FY22E VNB). We have not changed our estimates but we remove the 22% discount to VNB, reduce holding company discount to 10%, build in a 10x multiple to annual leakage at MAXF, and lastly we adjust our cost of capital downward to reflect lower rates. Key risks: higher cost over-runs, supply overhang due to promoter pledges, and non completion of deal.

Shares of Max Financial Services Ltd was last trading in BSE at Rs.471.2 as compared to the previous close of Rs. 475.8. The total number of shares traded during the day was 43375 in over 1677 trades.

The stock hit an intraday high of Rs. 482.6 and intraday low of 464. The net turnover during the day was Rs. 20475375.

Source : Equity Bulls

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