Worst seems over for Max Financial investors

Analysts believe stock has bottomed out, most negatives priced in

Shares of Max Financial Services (MFS) are down by a fourth in 2018 so far. Fears over a possible discontinuation of the tie-up between Max Life Insurance and Axis Bank to distribute the former’s life insurance products (as the bank is looking to enter the insurance business directly), and equity raising for potential acquisition of IDBI Federal Life Insurance Company by MFS, has weighed on investor sentiment.

However, the worst seems over for MFS as most of the negative news is priced in the stock, say analysts who instead believe there could be gains from here.

Consider this: In a bull-market scenario, analysts expect an over 30 per cent increase in the share price of MFS if none of the worries mentioned above materialise, especially the one related to Axis Bank’s tie-up with Max Life — a 70 per cent subsidiary of MFS, and assuming that the lender is offered a stake of 20 per cent in Max Life.

But what, if Axis Bank does directly foray into the insurance business and breaks its distribution tie-up with Max Life after commitment till September 2021. Given that Axis Bank accounted for 56 per cent of business garnered by Max Life during the nine months ending December 2017, a discontinuation of the tie-up should impact Max Life’s business — both its annual premium equivalent (APE: A sales measure for an insurance company based on new business won by it) and margins (profit from new business divided by annualised premium). But, even in this worst-case scenario, the stock could fetch returns of around 5 per cent, say analysts.

“Assuming a 40 per cent drop in new business APE in FY21 and a drop in margins to 10 per cent (due to no renewal of the tie-up) and long-term recovery to 14 per cent VNB (value of new business) margins, we estimate a value of ~470 per share (March 2020) for Max Financials’ 70 per cent holding in Max Life,” analysts at Nomura said in a report. VNB measures the economic value of profits expected to be earned from new business, after adjusting for cost of capital.

Apart from this, Max Life is also expected to acquire 51 per cent stake in IDBI Federal. If successful, the move will immediately strengthen Max’s distribution as IDBI Federal has banking channel partners — IDBI Bank and Federal Bank.

Lastly, the earlier fears of MFS funding this acquisition by raising fresh equity may also not materialise. MFS has indicated that if stock markets remain weak, acquisition would be funded through debt. “We had taken enabling approvals for both debt and equity from the Board to pursue acquisition opportunities for Max Life; however the equity markets have turned choppy ever since. So, we are progressing with the debt approvals from shareholders,” said the company’s spokesperson in an email.