Sharekhan has buy on Max Financial, target price Rs 650

Sharekhan has given a buy rating on Max Financial Services (MFS) with a price target of 650. The brokerage says the valuation for MFS appears attractive as it continues to be at a significant discount compared to some of the listed bank-owned insurance players. The recent development with Axis Bank as well as the arrangement with its partner in the insurance business is in the positive direction and will help offset the issue of promoter’s pledged shares. On Monday, the shares of the company traded at Rs 407.65, -5.18 per cent lower than Friday’s close at Rs 429.90.

MFS is the holding company (holds ~72.5 per cent share) of Max Life Insurance (MLI). MLI is a joint venture with a Japanese insurance partner, which holds 25 per cent share and is a global leader in life insurance.

The Max Financial Services (MFS) stock was impacted by problems in YES Bank, as 1) it has YES Bank as its second bancassurance partner constituting ~11 per cent of its Annualised Premium Equivalent (APE) and 2) its subsidiary, MLI had exposure of Rs.2,000 crore through tier-II bonds of YES Bank. As a result, the stock has seen some correction of late. MLI’s management has clarified that bond exposure is under the Held-to-Maturity (HTM) category. For now, it appears these bonds may not need to be marked down.


Investment Rationale

MFS holds MLI, which is among the leading private sector insurers. It has gained critical mass and enjoys strong operating parameters in the industry. MLI had delivered strong performance on both new and renewal business over the years. As the insurance sector is showing signs of sustained growth potential, the company’s well-diversified product mix and a strong distribution channel augur well and will help sustain healthy growth in premiums and profits. Strong focus towards customer measures has helped to deliver superior performance across parameters and will continue to remain an important differentiator.

The brokerage expects the company to invest more in its proprietary channel in the near term due to the developments. It has revised estimates and maintains Buy with a revised price target of Rs. 650 for Max Financial Services. The call valuation for MFS appears attractive as it continues to be at a significant discount compared to some of the listed bank-owned insurance players.

Sharekhan says there are significant long-term positives in the strong operational numbers for MLI. MLI will now have to focus increasingly on its proprietary business, which though near-term may pose risk of longer overruns. It is positive for longer-term business sustainability.

Key Risks: Adverse change in regulatory policies/guidelines may impact MLI’s profitability and growth.

Financials
For the quarter ended 31-12-2019, the company has reported consolidated sales of Rs 5365.68 crore, up 14.51 per cent from last quarter sales of Rs 4685.87 crore and up 19.18 per cent from last year same quarter sales of Rs 4501.98 crore. The company has reported net profit after tax of Rs 147.58 crore in the latest quarter.