Market share loss fears priced in for Max Financial, stock falls over 35%

With strong growth in premium income and profitability, the stock offers better risk-reward, say analysts

The lack of its own banking distribution channel has weighed on Max Financial Services’ (Max) stock price, amidst fears of market share loss. Firstly, since its merger with HDFC Life Insurance was called off (July last year), the stock has fallen over 35 per cent on worries that growth may slow down. Secondly, uncertainty regarding the continuation of distribution tie-up with Axis Bank after FY21 too kept valuation (price to embedded value) around 50 per cent below the industry average of close to three times, on growth worries. However, analysts believe these risks have been factored in, and there are gains from hereon.

“Potential risk from non-renewal of the distribution agreement with Axis Bank has already been priced in, though near-term visibility is there (till FY21). Max would increase contribution from proprietary and agency distribution channels. This would mitigate the negative impact if in case the tie up discontinues,” says Avinash Singh, an analyst at SBICAP Securities.

Even in the first half (H1) of FY19, share of proprietary distribution improved by 200 basis points to 35 per cent with increased investment. Despite more investment in the proprietary channel, profitability -- indicated by the value of new business margin - expanded 230 basis points year-on-year to 20.4 per cent, mainly due to rise in more-profitable protection products (such as term policies). Protection’s share increased to 13 per cent in H1FY19 from 10 per cent a year back. Increase in persistency ratio, which indicates stickiness of policyholders, too supported the margin expansion.

Notably, Max’s market share too improved by 90 basis points to nine per cent at the end of September 2018.

The annual premium equivalent (APE) too increased 25.6 per cent year-on-year to Rs 14.2 billion in H1FY19. APE is a common revenue measure for life insurers. Analysts expect it to increase by 20 per cent annually over FY18-20. However, the company’s consolidated profit before tax (Max does not report net profit on quarterly/half-yearly basis) fell 12 per cent year-on-year to Rs 1.8 billion due to one-time cost related to an acquisition.

The good performance for April-September 2018 (H1FY9; life insurers’ performance is normally analysed on a year-to-date basis), announced on Wednesday, also suggests that the growth fears may be unfounded.

Following the results, the stock surged 9 per cent. Given analysts’ target prices of over Rs 600, it indicates a potential upside of over 40 per cent.