Analyst Corner: ‘Buy’ on Max Financial with fair value of Rs 1,000

Max FS will use these proceeds to purchase the balance 5% stake in Max Life from Mitsui Sumitomo (about Rs 800-850 crore).

Max-Axis transaction approved by IRDA; reinitiate with buy. IRDA has approved the much-awaited (12%) stake sale in Max Life to Axis Bank. We continue to retain a constructive view of Max Life. With the regulatory overhang of the transaction behind us, we reinitiate coverage on Max FS with a fair value of `1,000 and ‘buy’ rating.

IRDA has granted formal approval for the acquisition of a 12% stake in Max Life by Axis Bank and its 100% subsidiaries from Max FS. As per the agreement, Axis Bank and its subsidiaries have the right to acquire up to 19% stake in Max Life in two tranches, viz. 12% stake sale to Axis group as 9% stake sale to Axis Bank and 3% stake sale to 100% subsidiaries of Axis Bank and subsequent stake sale of 7% in Max Life over the next few years.

The consideration of the transaction is linked to the book value of Max Life (estimated at Rs 700 crore based on historical data). Max FS will use these proceeds to purchase the balance 5% stake in Max Life from Mitsui Sumitomo (about Rs 800-850 crore). Max FS will subsequently sell down a 7% stake in Max Life to Axis group in the second tranche. Post the conclusion of all transactions, Axis Bank will own a 20% stake in Max Life Insurance (1% purchased previously); Max FS will own the balance 80% stake. Max FS thereafter proposes to collapse the holding-company structure (either by the merger or direct stake transfer).

We expect Max Life’s operating RoEV to remain strong at 19-20% over FY202-24E. Our estimates bake in 12% APE CAGR over FY2021-24E, marginal compression in the post-cost overrun VNB margin to ~24-25% (25.7% in FY2021E) over FY2022-24E due to increase in Ulips and par over the medium term and higher expenses overruns, stable unwinding rate of ~8.5% and marginal negative operating variance reflecting weak persistency trends.

We have a constructive view on Max Life; at our AV-based EV, the insurance business will trade at 3X EV FY2023E, higher than ICICI Life but lower than HDFC Life. We value Max FS at Rs 1,000/share considering an 80% stake in Max Life and a 10% holding-company discount. Reinitiate coverage with a ‘buy’ rating.

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