Fundamental View: Max India
Should you still stay invested in this scrip, or is it time to exit? Perhaps you are thinking of buying more. Confused? Read this analysis and take an informed decision.
APE likely to grow by 15% in FY2013: The company plans to grow its annual premium equivalent (APE) by around 15% in FY2013 compared with the 13% growth in FY2012. In the first two months of FY2013 the APE growth was flattish while the peer companies recorded a higher growth due to their focus on selective products (those with the highest net asset value [NAV] and the other short-term products).
Max New York Life Insurance (MNYL) continues to focus on the high-value traditional products targeting the affluent segment. This aids in maintaining a high persistency ratio and in posting healthy margins despite an adverse industry scenario.
NBAP margin may drop to ~14% after the regulations on non-par products: For FY2012 the company’s new business achieved profit (NBAP) margin was about 15% after the adjustment of the new regulations for the unit-linked insurance policies (ULIPs).
Going ahead, an Insurance Regulatory and Development Authority (IRDA) regulation is expected regarding the non-par policies (constituting 15% of MYNL’s products) which could affect the margins by around 100-150 basis points. Earlier, the Finance Bill, 2012, had proposed life cover should be at least 10x the annual premium paid for availing tax benefits. This could also lead to a change in the product structure.
Distribution tie-up with Axis Bank remains intact: The company has renegotiated an existing equity arrangement with Axis Bank regarding the latter’s 4% stake in MNYL. As per the deal, Max India will purchase the 4% equity stake held by Axis Bank in MNYL in tranches not exceeding 1% equity every year (before 2020). However, the distribution tie-up with Axis Bank, which contributes 40% of the sales, remains intact.
Mitsui Sumito—the new joint venture partner in insurance: Recently Mitsui Sumito concluded the acquisition of a 26% stake in MNYL from New York Life International Holdings (16.63 %) and Max India (9.37%) at Rs 2,731 crore, thereby valuing MNYL at 3.26x embedded value. Max India received around Rs800 crore in the transaction on a post-tax basis which could be deployed to expand the healthcare and health insurance businesses.
Healthcare business to break even in FY2013: Max Healthcare had 1,800 beds in FY2012 and added 205 beds (at the Dehradun hospital) recently, thereby increasing the total capacity to approximately 2,000 beds.
The operational beds in FY2013 would be around 1,600 and 2,000 in FY2014. For FY2012 the healthcare business reported a revenue growth of 20% YoY (Rs824 crore) and EBITDA of Rs12 crore (due to the fixed cost of expansion). The company expects to break even in FY2013 and report profit from this business FY2014 onwards.
Valuation: Max India’s strategy to focus on traditional products, targeting the affluent segment, aids in maintaining a high persistency ratio and in posting healthy margins despite an adverse industry scenario.
The company has invested in capacity addition in the healthcare business which could significantly add to the revenues in the coming quarters. Nevertheless, the other businesses (specialty films, health insurance etc) continue to grow at a healthy rate. The life insurance business is already delivering profits.
This along with the treasury corpus of Rs397 crore will take care of the funding requirements of the health insurance and healthcare segments. We maintain our BUY recommendation on the stock with our sum-of-the-parts valuation method based price target of Rs 234.
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