Buy Max Financial; target of Rs 661: HDFC Securities

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HDFC Securities’ research report on Max Financial

Driven by strong growth in Individual APE (24.4% YoY), Max Life’s total APE grew 23.1% YoY to Rs 16.5bn FY19: Total NBP/APE grew 18.6/21.6% to Rs 51.6/39.5bn. Among large sized Insurance companies, Max Life’s 4QFY19 Individual APE grew the fastest. SBIL/IPRUL/HDFCL printed growth of 22.9/12.6/1.5% YoY respectively. Protection share on an APE basis improved to 10.2% (+230bps YoY) lead by an increase in Indiv. protection (+65.7% YoY) to Rs 2.3bn for FY19. Investment in the proprietary channel is yielding benefits as the more profitable NPAR segment constitutes ~14% of proprietary vs. ~2% of Banca. VNBM drivers: Scope for further margin improvement exists on account of (1) continued focus on increasing protection share (2) declining additional proprietary channel investments and (3) economies of scale in proprietary channel. The company highlighted there is no tangible development on M&A deal with Axis bank. Management
highlighted that promoter pledge is expected to reduce as promoters are in advance talks to exit other group businesses and will be using proceeds of sale to repay debt.

Outlook

Driven by an increasing share of protection (10.2% share, +230 bps YoY) and lower effective tax rate, VNB margins expanded +150bps YoY to 21.7% (vs. 20.6 est). Consequently, absolute VNB grew a whopping 30.5% YoY to Rs 8.6bn. An upward revision in our margin estimates has boosted our TP to 661 (FY20 EV + 15.6x FY21E VNB).

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