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Sell Max India: Merrill Lynch

Merrill Lynch Research is bearish on Max India and recommended sell rating on the stock. The company continues to lose market share and its first year premia growth (though up 72% yoy) was 17% below research firm estimates and 30% below sector growth of 104%.

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Merrill Lynch Research is bearish on Max India and recommended sell rating on the stock. The company continues to lose market share and its first year premia growth (though up 72% yoy) was 17% below research firm estimates and 30% below sector growth of 104%.

Merrill Lynch report on Max India:

Valuations capture insurance upside

We are downgrading Max India to a Sell as we believe the upside to its insurance biz. (accounts for >75% of value) arising from higher NBAP multiples and margins is already captured in the share price (up 46% YTD; exceeded our previous price target of Rs 185). Further, the company continues to lose market share and its first year premia growth (though up 72% yoy) was 17% below our estimates and 30% below sector growth of 104%. Healthcare revenues too were 16% below our est.

Factoring higher NBAP multiples & margins

We have assigned higher NBAP multiples of 20x FY09E NBAP (v/s 16x earlier) that we believe markets are more likely to give Indian insurers owing to their strong growth trajectory; and higher margins that Max New York Life (MNYL) is likely to have because of the higher share of traditional policies and lower costs.

Sum of parts value at Rs 232 per share

Based on our revised multiples, we get a value of USD 1.6 billion for insurance; equivalent to Rs 181 per share (factoring in likely 20% equity dilution and 60% stake for Max India); and Rs 45 per share for its healthcare and other businesses and the fresh equity (net of debt) we get a total value of Rs 232 per share, underpinning our Sell. We, however, still see strong growth opportunities in the life insurance sector and recommend investors to Switch to Reliance Capital (RLCCF, C-1-7, Rs 977.05) or HDFC (HGDFF, C-1-7, Rs 1,830.70) as a play on life insurance. Higher valuations that other life insurers may get is key risk.