20 June 2016
Update | Sector: Financials
Max Financial Services
BSE SENSEX
26,626
S&P CNX
8,170
CMP: INR473
TP: INR545(+15%)
Buy
Mega merger on the anvil
Partnerships with three of top-five private banks biggest positive
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val ( INRm)
Free float (%)
MAXF IN
267.0
514/303
22/14/24
126.2
1.9
170
70.0
Financials Snapshot (INR b)
Y/E Mar
2016 2017E 2018E
APE
21.1 24.1 27.6
NBAP
3.8
4.2
5.0
Closing EV
56.2 61.5 67.0
Statutory PAT
4.4
4.4
5.4
APE gr. YoY, %
7.4 14.0 14.5
NBAP margin, % 17.9 17.4 18.1
Oper. RoEV, %
17.0 17.0 17.4
EV/Sh (INR)
210.4 230.4 251.0
P/EV (x)
3.0
2.8
2.5
Shareholding pattern (%)
Mar-16 Dec-15 Mar-15
Promoter
30.5
40.4
40.5
DII
47.5
50.4
23.6
FII
12.7
0.0
24.1
Others
9.4
9.2
11.8
FII Includes depository receipts
Stock Performance (1-year)
Max Financial
Sensex - Rebased
500
450
400
350
Jun-16
Mar-16
Dec-15
Sep-15
Jun-15
300
Event: Max Financial Services (MFS) and Max Life have entered into an agreement
for a potential merger with HDFC Life. Under this arrangement, Max Life will first
merge with MFS, which will in turn merge with HDFC Life. This arrangement will
ensure an automatic listing for HDFC Life.
We raise price target by ~30% to INR545: We assign 75% probability to the
proposed merger going through, resulting in significantly better growth prospects
for Max Life (addition of several bancassurance partners). While the swap ratio
remains unannounced, we believe eventually HDFC Life would trade at 2.5x+
FY18E EV, given the strong growth and return profile of the combined entity (refer
exhibit 1).
Granularity in sourcing to increase post-merger; risk of AXSB exit remains low:
We believe there is very low risk of dissolution of Axis Bank (AXSB) partnership –
6% stake in Max Life. The current arrangement is valid for five years, with 1% stake
vesting each year from 2017 to 2021. Currently, AXSB earns ~INR5b income from
selling life insurance policies (excluding equity stake sale gains). Given the strong
growth potential, we expect the bank to generate INR10b+ of commission income
by FY21 – a sizable income contributor that we believe it would not like to
jeopardize. Further, post the merger, contribution of AXSB to the combined entity
would be significantly lower than the current 50%+. Increase in granularity within
the bancassurance network is likely to reduce the possibility of any additional
equity offerings to banks.
Valuation and view: We like Max Life for its management quality, higher
proportion of long-term savings business, healthy operational efficiency, strong
bancassurance tie-ups, robust return ratios, and excess capital position. Further,
potential merger with HDFC Life is expected to increase the granularity in
distribution network. Our probability-weighted target price reflects the upside to
appraisal value from possible improvements in operational performance. We
value Max Life on appraisal value methodology, leading to pre-merger value of
~INR160b (2.4x FY18E EV) and post-merger value of ~INR225b (3.3x FY18E EV and
~3x FY18E EV excluding dividend payouts). Adjusting for MFS’ 68% stake in Max
Life and adding the INR2.7b cash with MFS, we arrive at a post-merger TP of
INR545/share. While the swap ratio for the merger remains unannounced, we
believe eventually HDFC Life would trade at 2.5x+ FY18E EV, given the strong
growth and return profile of the combined entity. Buy.
Key risks: (a) Complex shareholding structure, (b) Regulatory approvals, and (c)
Continuity of partnerships with Yes Bank post 2018 and Axis Bank post 2021.
Dhaval Gada ([email protected]); +91 22 3982 5505
Alpesh Mehta ([email protected]); +9122 3982 5415/Krishnan ASV ([email protected]); +9122 3010 2603
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Max Financial Services
Exhibit 1: Merged Financial Snapshot
FY16
INR m
HDFC Life
Max Life
Merged
NBAP (Pre-overruns)
7,866
3,880
11,746
NBAP (Post-overruns)
APE
Embedded value
6,599
33,330
102,050
3,780
21,130
56,170
10,379
54,460
158,220
23.6
19.8
18.3
18.4
17.9
15.7
21.6
19.1
17.4
Product Mix (%)
PAR
Non PAR
Linked
30
15
55
61
12
27
42
14
44
Distribution Mix (%)
Individual Agency
Bancassurance
Others
13
68
18
28
58
15
19
64
17
Pre-cost NBAP (%)
Post-cost NBAP (%)
RoEV (%)
Source: MOSL, Company
Exhibit 2: Combined entity to become the largest private life insurer with ~24% share
Individual APE Market Share (%)
HDFC Life (merged)
ICICI Pru Life
SBI Life
HDFC Life
Max Life
Kotak Old Mutual
PNB Metlife
Reliance Life
Bajaj Allianz
Birla Sunlife
Tata AIA
Exide Life
Canara HSBC
Shriram Life
Star Union Daiichi
Bharti AXA
IDBI Federal
IndiaFirst
Aviva
DHFL Pramerica
Edelweiss Tokio
Aegon Religare
Future Generali
Sahara
Private Sector
LIC
FY12
24.1
16.1
12.0
15.5
8.6
2.7
2.9
6.3
7.5
6.7
3.5
3.5
2.7
0.9
1.6
1.1
1.2
1.1
2.8
0.5
0.1
1.1
1.4
0.3
36.5
63.5
FY13
26.0
18.5
13.4
17.5
8.5
2.6
3.1
5.5
6.9
5.8
1.7
2.9
2.0
1.1
1.5
1.2
1.4
1.4
2.3
0.8
0.2
0.7
0.9
0.2
38.0
62.0
FY14
24.0
18.9
16.3
13.8
10.2
2.7
3.3
6.5
5.8
4.9
1.4
2.9
1.6
1.1
2.0
1.7
1.5
0.9
1.8
0.6
0.4
0.8
0.8
0.2
38.0
62.0
FY15
24.6
23.0
15.6
14.8
9.7
3.1
3.6
6.0
3.9
3.7
1.2
2.2
1.6
1.3
2.0
1.8
1.3
0.8
1.5
0.7
0.5
1.0
0.7
0.1
49.0
51.0
FY16
23.9
21.9
18.8
14.7
9.3
4.1
4.0
3.9
3.2
3.0
2.7
2.1
1.9
1.6
1.6
1.6
1.4
1.0
0.7
0.7
0.6
0.6
0.5
0.1
51.5
48.5
Source: MOSL, Life Insurance Council, Company
20 June 2016
2
Max Financial Services
Valuation and view

Raise TP to
INR545 v/s
INR420
previously




Long term opportunity in India’s life insurance sector remain attractive; overall
the past couple of years, new business growth has recovered with cost control
and profitability remaining key focus area for most insurers. Outlook on
regulatory environment remains positive with all major areas (product,
distribution and expenses) already seeing guideline changes. Interestingly, the
last couple of regulatory developments (i.e. proposed bank broker model and
expense of management) have ended up being more accommodative for the
industry v/s and severe negative impact seen previously. Hence, we remain
positive on the sector.
Potential merger with HDFC Life will make the combined entity the largest
private life insurer. Further, it will also strengthen the market share in ‘Par’
business (2nd largest player after LIC).
We prefer MAX for its management quality, higher proportion of long-term
savings business, healthy operational efficiency, strong bancassurance tie-ups,
robust return ratios, and excess capital position. Granularity in distribution
network is likely to increase post-merger.
We value Max Life on appraisal value basis. We assume cost of equity at 13.3%
and terminal growth rate at 4% (unchanged). We assign 75% probability of
merger going through, leading to pre-merger value of ~INR160b (P/EV of 2.4x
FY18E) and post-merger value of ~INR225b (P/EV of 3.3x FY18E and ~3x P/EV
FY18E excluding dividend payouts). Adjusting for MAX’s 68% stake in Max Life
and adding the INR2.7b cash with MAX, we arrive at post-merger TP of
INR545/share. While the swap ratio for the merger remains unannounced, we
believe eventually HDFC Life is likely to trade at 2.5x+ FY18 P/EV given the
strong growth and return profile of the combined entity.
We do not ascribe any holding company discount to MAX, as Max Life is the only
major business owned and substantial portion of the dividend income received
from Max Life is likely to flow through to MAX shareholders.
Exhibit 3: Merged Financial Snapshot (INR b)
Embedded Value (FY17E)
Value of future new business
Appraisal value
MFS stake (68%)
Cash at Holdco.
Target price
Shares outstanding
Target price per share (INR)
Probability of merger (%)
Probability weighted TP (INR)
Pre
Post
61.5
61.5
98.9
163.9
160.4
225.4
109.1
153.3
2.7
2.7
111.8
156.0
0.3
0.3
420
585
75%
545
Source: MOSL, Company
Key risks to our estimate
(a) Complex shareholding structure, (b) Regulatory approvals and (c) Continuity
of Yes Bank post 2018 and Axis Bank post 2021.
 Higher corporate tax rate or negative outcome from final guidelines on
commission expenses; based on our interactions with the regulator and industry
participants, this looks less likely.

20 June 2016
3
Max Financial Services
Exhibit 4: Max Life embedded value projections (pre-merger)
Traditional Embedded Value
(INR m)
MCEV
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
FY19E
FY20E
Opening Embedded Value
13,160
22,840
27,230
32,160
36,840
37,560
44,010
52,320
56,170
61,509
67,024
73,124
Net Asset Value
3,620
7,670
8,800
11,410
17,110
18,980
19,450
21,150
20,760
Value of in-force business
9,540
15,170
18,430
20,750
19,730
18,580
24,560
31,170
35,410
Unwind
1,900
2,610
3,360
4,190
3,920
3,790
4,000
5,130
5,342
5,727
6,173
6,662
% of opening EV
14.4
11.4
12.3
13.0
10.6
10.1
9.1
9.8
9.5
9.3
9.2
9.1
3,120
2,670
2,350
1,680
2,130
2,400
4,600
3,880
4,375
5,105
5,873
6,752
-3,920
-3,770
-2,550
-1,020
-150
-60
-370
-100
-175
-125
0
0
-800
-1,100
-200
660
1,980
2,340
4,230
3,780
4,200
4,980
5,873
6,752
37.5
-81.8
-430.0
200.0
18.2
80.8
-10.6
11.1
18.6
17.9
15.0
Operating variance
-3,830
-2,550
-1,760
-1,950
-2,080
-340
1,230
-140
-175
-125
0
0
Operating Profit
1,190
2,730
3,950
3,920
3,970
5,850
9,830
8,870
9,543
10,707
12,046
13,414
129.4
44.7
-0.8
1.3
47.4
68.0
28.2
7.6
12.2
12.5
11.4
Value of new business
(pre cost over-runs)
Acquisition cost over-run
Value of new business
(post cost over-runs)
Growth YoY (%)
Growth YoY (%)
Non-operating variance
990
-250
980
760
-230
-790
2,540
-630
0
0
0
0
Net capital movement
7,500
1,910
0
0
-3,020
-3,090
-4,060
-4,390
-4,204
-5,192
-5,946
-6,682
Capital Infusion
7,500
1,910
0
0
0
0
0
0
0
0
0
0
0
0
0
0
-3,020
-3,090
-4,060
-4,390
-4,204
-5,192
-5,946
-6,682
Closing Embedded Value
22,840
27,230
32,160
36,840
37,560
39,530
52,320
56,170
61,509
67,024
73,124
79,856
Net Asset Value
7,670
8,800
11,410
17,110
18,980
19,310
21,150
20,760
Value of in-force business
15,170
18,430
20,750
19,730
18,580
20,220
31,170
35,410
15,340
25,320
32,160
36,840
40,580
42,620
56,380
60,560
65,713
72,216
79,070
86,538
Dividend
Embedded Value
pre-capital movement
Growth YoY (%)
APE
16.6
10.9
18.1
14.6
10.2
13.5
28.1
15.7
17.0
17.4
18.0
18.3
15,950
15,840
17,240
15,060
15,130
17,690
19,670
21,130
24,080
27,564
31,710
36,459
-0.7
8.8
-12.6
0.5
16.9
11.2
7.4
14.0
14.5
15.0
15.0
16.9
13.6
11.2
14.1
13.6
23.4
18.4
18.2
18.5
18.5
18.5
Growth YoY (%)
New business margins (%)
Pre-cost over-runs
19.6
Post-cost over-runs
-5.0
-6.9
-1.2
4.4
13.1
13.2
21.5
17.9
17.4
18.1
18.5
18.5
Cost over-runs
24.6
23.8
14.8
6.8
1.0
0.3
1.9
0.5
0.7
0.5
0.0
0.0
Operating RoEV (%)
9.0
12.0
14.5
12.2
10.8
15.6
22.3
17.0
17.0
17.4
18.0
18.3
Non-Operating RoEV (%)
7.5
-1.1
3.6
2.4
-0.6
-2.1
5.8
-1.2
0.0
0.0
0.0
0.0
RoEV (%)
16.6
10.9
18.1
14.6
10.2
13.5
28.1
15.7
17.0
17.4
18.0
18.3
Source: MOSL, Company
20 June 2016
4
Max Financial Services
Exhibit 5: Max Life embedded value projections (post-merger) – Major impact on growth trajectory
Traditional Embedded Value
(INR m)
MCEV
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
FY19E
FY20E
Opening Embedded Value
13,160
22,840
27,230
32,160
36,840
37,560
44,010
52,320
56,170
61,509
67,748
75,225
Net Asset Value
3,620
7,670
8,800
11,410
17,110
18,980
19,450
21,150
20,760
Value of in-force business
9,540
15,170
18,430
20,750
19,730
18,580
24,560
31,170
35,410
Unwind
1,900
2,610
3,360
4,190
3,920
3,790
4,000
5,130
5,342
5,727
6,223
6,816
% of opening EV
14.4
11.4
12.3
13.0
10.6
10.1
9.1
9.8
9.5
9.3
9.2
9.1
3,120
2,670
2,350
1,680
2,130
2,400
4,600
3,880
4,375
5,779
7,200
8,755
-3,920
-3,770
-2,550
-1,020
-150
-60
-370
-100
-175
-50
0
0
-800
-1,100
-200
660
1,980
2,340
4,230
3,780
4,200
5,729
7,200
8,755
37.5
-81.8
-430.0
200.0
18.2
80.8
-10.6
11.1
36.4
25.7
21.6
Operating variance
-3,830
-2,550
-1,760
-1,950
-2,080
-340
1,230
-140
-175
-75
0
0
Operating Profit
1,190
2,730
3,950
3,920
3,970
5,850
9,830
8,870
9,543
11,431
13,423
15,571
129.4
44.7
-0.8
1.3
47.4
68.0
28.2
7.6
19.8
17.4
16.0
Value of new business
(pre cost over-runs)
Acquisition cost over-run
Value of new business
(post cost over-runs)
Growth YoY (%)
Growth YoY (%)
Non-operating variance
990
-250
980
760
-230
-790
2,540
-630
0
0
0
0
Net capital movement
7,500
1,910
0
0
-3,020
-3,090
-4,060
-4,390
-4,204
-5,192
-5,946
-6,682
Capital Infusion
7,500
1,910
0
0
0
0
0
0
0
0
0
0
0
0
0
0
-3,020
-3,090
-4,060
-4,390
-4,204
-5,192
-5,946
-6,682
Closing Embedded Value
22,840
27,230
32,160
36,840
37,560
39,530
52,320
56,170
61,509
67,748
75,225
84,114
Net Asset Value
7,670
8,800
11,410
17,110
18,980
19,310
21,150
20,760
Value of in-force business
15,170
18,430
20,750
19,730
18,580
20,220
31,170
35,410
15,340
25,320
32,160
36,840
40,580
42,620
56,380
60,560
65,713
72,939
81,171
90,796
Dividend
Embedded Value
pre-capital movement
Growth YoY (%)
APE
16.6
10.9
18.1
14.6
10.2
13.5
28.1
15.7
17.0
18.6
19.8
20.7
15,950
15,840
17,240
15,060
15,130
17,690
19,670
21,130
24,080
31,304
39,130
47,738
-0.7
8.8
-12.6
0.5
16.9
11.2
7.4
14.0
30.0
25.0
22.0
16.9
13.6
11.2
14.1
13.6
23.4
18.4
18.2
18.5
18.4
18.3
Growth YoY (%)
New business margins (%)
Pre-cost over-runs
19.6
Post-cost over-runs
-5.0
-6.9
-1.2
4.4
13.1
13.2
21.5
17.9
17.4
18.3
18.4
18.3
Cost over-runs
24.6
23.8
14.8
6.8
1.0
0.3
1.9
0.5
0.7
0.2
0.0
0.0
Operating RoEV (%)
9.0
12.0
14.5
12.2
10.8
15.6
22.3
17.0
17.0
18.6
19.8
20.7
Non-Operating RoEV (%)
7.5
-1.1
3.6
2.4
-0.6
-2.1
5.8
-1.2
0.0
0.0
0.0
0.0
RoEV (%)
16.6
10.9
18.1
14.6
10.2
13.5
28.1
15.7
17.0
18.6
19.8
20.7
Source: MOSL, Company
20 June 2016
5
Max Financial Services
Financial and Valuations – Max Life Insurance
INR m
FY11
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
FY19E
57,362
63,208
65,703
72,118
81,051
91,389
102,676
116,346
132,583
9,908
3,034
12,994
21,622
41,057
12,899
36,994
44,113
52,268
118
94
12
131
441
19
0
0
0
24
18
102
177
146
147
154
163
171
67,413
66,354
78,811
94,048
122,695
104,454
139,824
160,621
185,022
5,399
5,804
6,140
6,828
7,486
8,210
9,160
10,327
11,662
Operating expenses
14,404
12,542
12,288
12,038
12,419
12,496
13,377
14,133
14,933
Benefits paid (net)
13,049
17,815
26,069
29,837
35,323
31,461
41,339
47,555
54,805
31,020
23,949
27,999
39,090
61,139
46,888
68,209
80,520
92,817
32
19
38
630
629
767
739
820
920
63,905
60,130
72,536
88,423
116,996
99,821
132,824
153,354
175,137
3,508
6,224
6,275
5,625
5,699
4,632
7,001
7,266
9,885
0
0
0
0
0
0
0
0
0
3,508
6,224
6,275
5,625
5,699
4,632
7,001
7,266
9,885
3,299
4,112
3,023
2,944
2,835
3,351
3,562
4,436
5,315
Policyholder Account
Premiums earned (Net)
Income from Investments
Contribution from SH
Other income
Total (A)
Commission
Change in valuation of policy
liabilities
Other expenses
Total expenses and provisions (B)
Surplus / (deficit) (C)=(A)-(B)
Provision for taxation
Surplus / (deficit) after tax
Shareholder Account
Transfer to Shareholders’ account
Income From Investments
856
1,500
2,193
2,415
2,706
2,192
2,033
2,446
2,585
Other income
0
144
0
0
0
0
0
0
0
Total income
4,154
5,756
5,216
5,359
5,541
5,544
5,595
6,882
7,901
Operating expenses
2,095
1,064
450
198
325
415
500
589
694
118
94
12
131
441
19
0
0
0
0
0
0
0
0
0
0
0
0
1,941
4,598
4,754
5,031
4,776
5,110
5,095
6,293
7,207
0
0
519
672
634
718
731
903
1,034
1,941
4,598
4,234
4,359
4,142
4,391
4,364
5,390
6,173
0
0
3,020
3,090
4,060
4,390
4,204
5,192
5,946
Contribution to the Revenue
Account
Provisions (other than taxation)
Profit / (Loss) before tax
Provision for Taxation
Profit / (Loss) after tax
Total Dividend
20 June 2016
6
Max Financial Services
Financial and Valuations – Max Life Insurance
Balance Sheet
FY11
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
FY19E
18,410
19,447
19,447
19,447
19,188
19,188
19,188
19,188
19,188
Liabilities
Share Capital
Reserves and Surplus
2,151
2,581
2,034
1,823
952
954
1,114
1,312
1,539
20,561
22,028
21,481
21,270
20,141
20,142
20,302
20,500
20,727
122,733
146,898
174,684
217,135
279,846
325,054
403,260
484,353
577,935
Other liabilities
1,568
4,264
6,814
10,197
13,691
14,660
19,837
23,097
28,190
Total Liabilities
144,862
173,190
202,980
248,601
313,678
359,856
443,399
527,950
626,852
Shareholders’ Investments
13,199
21,882
27,111
27,751
26,227
23,918
28,774
30,413
32,473
Policyholders’ Investments
36,470
51,612
72,921
106,102
151,980
202,784
253,149
319,773
397,059
Assets held to cover linked liabilities
88,696
98,657
104,547
113,304
133,996
131,538
159,310
175,344
194,590
116
159
296
417
592
764
925
1,156
1,445
1,402
1,199
1,257
1,180
1,188
1,679
1,762
1,851
1,943
-4,072
-4,720
-5,845
-1,369
-304
-827
-520
-585
-657
756
703
0
0
0
0
0
0
0
8,296
3,698
2,693
1,217
0
0
0
0
0
Total Assets
144,862 173,190 202,980 248,601 313,678 359,856 443,399
Note: We have currently not published accounts for Max Financial Services since it is just a holding company.
527,950
626,852
Networth
Policyholders Funds
Assets
Investments
Loans
Fixed assets
Net current assets
Misc. Expenses
Debit balance in P&L
20 June 2016
7
MAX FINANCIAL SERVICES GALLERY
SECTOR UPDATES
Max Financial Services
NOTES
20 June 2016
9
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Max Financial Services
No
No
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20 June 2016
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10