Buy Max Financial Services; target of Rs 600: Motilal Oswal

Merged entity valuation of USD10b at swap ratio Increasing TP for MAX by 10% and HDFC Ltd by 5% Event: The boards of MAX Financial Services (MFS), MAX Life, HDFC Life and MAX India have finalized the scheme of merger between MAX Life and HDFC Life. MFS’ life insurance business will be merged with HDFC Life, while its other businesses will be merged with MAX India. At the time of merger announcement (18-June 2016), both entities (MAX Life and HDFC Life) had mutually agreed for a 60-day period to finalize deal valuations.

Significant synergies post-merger: Potential merger with HDFC Life will make the combined entity the largest private life insurer. Further, it will also strengthen its market share in the ‘Par’ business (second largest player after LIC). For FY16, MAX Life /HDFC Life reported cost overrun of 50/380bp, and for the combined entity, it stood at 250bp. With synergies, we expect growth to accelerate (driving operating leverage) and cost savings to take place (branding, training, etc.). The combined entity will benefit from the strong agency distribution platform of MAX Life and tie-ups on bancassurance (8 banks tied-up, with three being large private banks). Combined entity ROEV for FY16 stood at 17.5%, which we expect to improve further with cost overruns coming down.