| Summary of Contents
| STOCK UPDATE Max India
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs234
Current market price: Rs190 APE to grow at 15% in FY2013; margins likely to decline -
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 Rs2,731 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, may turn profitable in FY2014: 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. Valuations
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 Rs234.
SECTOR UPDATE Insurance APE of life insurers grew 38.6% MoM in May 2012 -
During May 2012, the annual premium equivalent (APE) of the life insurance industry declined by 2.5% year on year (YoY) but increased 38.6% month on month (MoM). The month-on-month (M-o-M) growth in the APE was mainly contributed by the private players, which reported a growth of 66% in May this year. Life Insurance Corporation of India (LIC) showed an M-o-M growth of 28% (down 12.6% YoY). Companies like SBI Life Insurance Company (SBI Life), Bajaj Allianz Life Insurance (Bajaj Allianz) and HDFC Standard Life (HDFC Life) showed a strong growth on an M-o-M basis while Max New York Life Insurance (MNYL)'s APE growth remained flattish. -
In terms of APE growth for May 2012, six out of 18 private players posted a decline YoY with Tata AIG Life Insurance (Tata AIG) showing the highest contraction of 35.8% followed by MNYL, which showed a contraction of 16.2% YoY. However, on a year-till-date (YTD) basis, the life insurance industry reported a decline of 4.4% in APE. -
The market share of the private players increased to 33.7% in May 2012 while that of LIC decreased to 66.3% (71.8% in April). Among the private players, SBI Life's market share declined to 10.1% from 11.2% in May 2011 while that of ICICI Prudential declined to 16.3% from 17.2% in May 2011. The share of MNYL declined to 5.6% as against 8.4% in May 2011. Going ahead, the growth in APE is likely to remain sluggish as new guidelines for products may be announced and the insurers may have to refile the products with the Insurance Regulatory and Development Authority (IRDA) based on the new guidelines. APE declines by 2.5% YoY (up 38.6% MoM)
On a year-on-year (Y-o-Y) basis the APE growth declined by 2.5% in May 2012, mainly contributed by LIC, which showed a decline of 12.6% YoY in its APE. The private players, however, fared better as their APE increased by 26% YoY (up 65.6% MoM). The sharp sequential growth was mainly due to a sharp decline in April due to the seasonality after the end of a fiscal.
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