Max Financial's life insurance business continued to do well with overall annual premium equivalent (APE) growth was 22 percent YoY.
Shares of Max Financial Services gained 7.8 percent intraday on November 7 after brokerages remained bullish on the stock, expecting a 28-36 percent return after Q2 earnings and terminating the agreement with Mitsui.
Max Financial has put up to withdraw the application for share swap and purchase transaction for Mitsui Sumitomo Insurance Company's (MSI) stake in Max Life for Max Financial shares as an agreement for the finalisation of definitive terms were not reached.
MSI will remain as JV partner of Max Life continuing existing arrangements.
"Transaction arrangement may not be required for the reverse merger but some issues have to be ironed out like a one-off pending contingent liability from erstwhile telecom investment. Management also showcased confidence on being strongly associated with Axis but are still to reach an arrangement for the future course of action," said Prabhudas Lilladher which retained buy rating with a target price of Rs 596 (revised from Rs 695 earlier), implying 36 percent potential upside from current levels.
However, the brokerage lowered its multiple to 1.8x (from 2.3x) based on Sep-21 embedded value (EV) and increased holding company discount to 40 percent as overhang remains from promoter pledge, rationalizing ownership structure and business partner uncertainty.
Max Financial's life insurance business continued to do well with overall annual premium equivalent (APE) growth was 22 percent YoY continued to be led by non-par savings continued from limited pay short duration endowment type product which is fully hedged. Protection continued to deliver strongly with 30 percent YoY growth but the mix has been slightly off to 14 percent in APE mix.
Life EV grew by 26 percent YoY and VNB grew by 25 percent leading to a margin of 21 percent in the first half of FY20 (implied 22 percent in Q2FY20) versus 19.6 percent in Q1FY20.
While retaining buy call with a target price at Rs 560 (revised from Rs 550 earlier), CLSA sees a 17 percent CAGR for premiums over FY19-22.
"Margin expansion will drive an 18 percent VNB CAGR and return on embedded value (RoEV) of 22 percent. Clarity on the banca tie-up and pledges is key for valuations to improve," it said, adding increased surrenders and higher operating expenses can drag core margins.
Max Financial Services' Q2 consolidated profit fell 49 percent year-on-year to Rs 42.2 crore, but revenue increased 8.6 percent to Rs 4,686 crore compared to year-ago.
The company clarified that its exposure to troubled NBFCs was limited. Its exposure to IL&FS was at Rs 40 crore and was fully provided for, while its non-linked exposure to DHFL was only Rs 5 crore (with 60 percent coverage). Pledged shares increased temporarily as stock price corrected during the quarter.
"With Axis Bank embracing open architecture and adding a life insurance partner we expect business growth momentum to slow down. Additionally, we continue to watch out for the renewal of the partnership with Axis Bank. We cut our APE growth and VNB margin assumptions," said HDFC Securities which rated Max Financial a buy with a reduced target of Rs 565, implying 29 percent potential upside from current levels.The stock was quoting at Rs 470, up Rs 31.55, or 7.20 percent on the BSE at 1119 hours IST. It was in addition to 2 percent gains in the previous session.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.