Max Financial: Investors should shift attention to fundamentals

With 72 per cent gains in six months, the stock is an outperformer in the pack; monthly premium numbers don't provide comfort

The year has belonged to insurance stocks so far, particularly life insurers. Among the lot, Max Financial Services, the holding company of Max Life Insurance (MLI), is the clear winner with gains of 72 per cent in six months. Thus far, its deal with Axis Bank, first announced in February, has kept the interest alive. In fact, with revised terms of the merger, analysts at CLSA, Emkay Global, Sharekhan, and Investec Securities say the deal is more or less done. CLSA says regulatory uncertainties are less likely.

However, trading at Rs 618.1 a share and despite its benign valuations of 1.8x FY21 estimated price to embedded value (P/EV), does one need to question the rally? To find an answer, one needs to review the deal details and MLI’s fundamentals.

According to reports, Axis Bank plans to pick up 17 per cent stake in MLI instead of the earlier 29 per cent. Earlier, Axis Bank was to acquire stake in MLI for Rs 28.62 a share and had a put option (option to sell) Max Life’s shares at a price of Rs 294 per share.

True, valuations are highly subjective as MLI is an unlisted company. However, MLI is wholly-owned arm of Max Financial and also its sole subsidiary. By that logic, Max Financial’s stock price should reflect MLI’s worth. Even assuming a holding company discount of 30 per cent, valuations work out to around Rs 430 a share. While the background of the deal with Axis Bank isn’t fully out in public, by virtue of some arrangement, the deal may have been priced at Rs 28.62 a share. Pricing of unlisted companies need not be by guided by stock market price. However, a put option price (Rs 294 per share) at less than half of Max Financial’s present market price also indicates the Street’s exuberance.

As for fundamentals, in a quarter (June) when peers witnessed stable new business value (NBV) premium, Max Financial’s shrank by 260 basis points (bps) year-on-year (YoY). For an insurer focused on protection plans (14 per cent of annualised premium equivalent) and 65 per cent of business coming from non-ULIP (unit linked insurance plans; also the highest among peers), its NBV dipped by three per cent YoY, despite term protection plans being the industry’s lever in Q1. While its year-to-date APE growth has been flat against peers’ steep decline, its implication on financials will be known in a few weeks.

Factoring in the stock price run up mostly on the back of Axis Bank’s deal talks, which has been pending for over 32 days after the reapplication in August and 221 days since it was announced in February, investors should tread carefully.