ADD on Max Financial - Lower margins despite higher protection - HDFC Securities

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

Despite a difficult environment, MAXL delivered an APE decline of just 3.5% YoY. The margin was 250bps YoY lower mainly due to an increase in reinsurance costs, which the company has passed on 2QFY20 onwards. We expect the margin to improve hereon. We believe the deal with AXSB will provide long-term distribution capability. We expect an FY21-23E APE/VNB CAGR of 12.6/16.2%. We retain our ADD rating with an unchanged target price of Rs 645 (FY21E EV + 21.3x FY22E VNB).

1QFY21 highlights: Total APE declined 3.5% YoY to Rs 6.61bn but was 3.3% above our estimate. The share of protection in the mix grew 1,000/1,394bps YoY/QoQ to 25.0% as individual/group protection grew 101.9/32.3% YoY. Group protection was driven by higher GTI business. Share of NPAR savings in the mix also improved 300/389bps YoY/QoQ to 18.0%. The share of PAR and ULIP declined as customers chose protection and assured returns. VNB/VNB margin were at Rs 1.13bn/17.1% (Rs (210mn)/(250bps) YoY) led by (1) positive business mix and other assumptions (Rs 220mn, +320bps YoY), (2) lower interest interests (Rs (260mn), -390bps YoY), (3) cost over-run (Rs (120mn), -180bps) and (4) lower APE (Rs (50mn)/NA YoY). Management stated that it had not passed on higher reinsurance rates on protection and this, along with lower interest rates and an adverse interest rate curve, impacted margins.

As expected, persistency declined in the range of 100-300bps QoQ across all cohorts except for the 61st month. The share of proprietary/AXSB channel grew 400/1100bps YoY to 37.0/56.0%, while that for other banks/channels declined. AUM grew 14.4/7.0% YoY/QoQ to Rs 732.5bn. Max reported solvency of 212%. Operating RoEV was at 15.9%.

Outlook: NPAR savings and protection are expected to sustain in a difficult FY21E, where we expect MAXL's APE/VNB to decline 4.2/5.6% YoY. We expect regulatory approvals for JV with AXSB to come through over FY21E.

Shares of Max Financial Services Ltd was last trading in BSE at Rs.538 as compared to the previous close of Rs. 542.6. The total number of shares traded during the day was 136349 in over 3890 trades.

The stock hit an intraday high of Rs. 548.05 and intraday low of 530.35. The net turnover during the day was Rs. 73506965.

Source : Equity Bulls

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