Maintain BUY on Max Financial - Worst is behind - HDFC Securities

Mr. Madhukar Ladha, Institutional Research Analyst, HDFC Securities.

Max Financial (Q4FY20): Worst is behind. Maintain BUY
(TP Rs 620, CMP Rs 444, MCap Rs 120bn)

MAXL's 4QFY20 APE declined 15.1% YoY (better than expected!) to Rs 15.1bn as lock-down impacted sales in Mar-20. Total VNB for FY20 grew 4.8% YoY to Rs 9.0bn as margins declined 10bps YoY to 21.6%. We maintain our BUY rating with TP of Rs 620.

Protection (4QFY20) grew 50.8% YoY to Rs 1.8bn and its share rose 571bps YoY to 13.1%. For FY20, protection grew 41.7% YoY, contributing 13.8% to total APE. Limited pay protection is driving higher protection sales.

NPAR savings contribution to total APE increased 97bps YoY to 14.1% while contribution of PAR (-360bps, 32.4%) and ULIP (-146bps, 42.4%) declined. Management expects NPAR savings contribution to increase as customer risk appetite is low. Company stated that given the yield curve, it planned to increase the duration of the NPAR savings product to 8 years.

VNB margin was at 21.6% (-10bps YoY). Better product mix drove margins higher by 190bps, while higher acquisition costs and other factors pulled down margin by 190/10bps YoY. Investments in proprietary channel continue to burden margins.

Deal on track: MaxF settled its telecom tax liability dispute by paying Rs 1.2bn. It is awaiting approval from the CCI for investment by Axis Bank and DEA for share swap into MaxF. Respective parties have also filed for approval with RBI and IRDAI. Expects deal to be completed by Mar-21.

Covid-19 impact: Management stated that new policy sales and renewals were severely impacted in Mar-20. MAXL has completely digitized the sales process and has increased its underwriting decision making over video calls and through tele-medicals. Management stated that outlook for savings business remains muted and it expects increased protection/NPAR share in mix to make up for VNB loss. Overall it aims to FY20 absolute VNB in FY21E. Management indicated that sales trends have improved in Apr/May-20 and renewals are also back to normal levels in May-20.

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 AXSB distribution arrangement. We expect MAXL to lower its dependence on proprietary channels which will be VNBM accretive as investments in channels reduce. We have increased our VNB estimates for FY20/21E by 18.4/15.6%, and fine tuned our DCF assumptions, resulting in a 10.7% increase in TP to Rs 620. Key risks: Lower growth, higher cost over-runs, supply overhang due to promoter pledges, and any hurdles in deal.

Shares of Max Financial Services Ltd was last trading in BSE at Rs.465.6 as compared to the previous close of Rs. 443.8. The total number of shares traded during the day was 58214 in over 2005 trades.

The stock hit an intraday high of Rs. 470.65 and intraday low of 430.8. The net turnover during the day was Rs. 26517939.

Source : Equity Bulls

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