Max Financial falls 8.5% on report of merger delay

Fall offers attractive entry, feel analysts

The share price of Max Financial Services, holding company of Max Life Insurance, declined as much as 13 per cent in Wednesday’s trade amid news reports that its merger with HDFC Life could be delayed further. Reports suggested the deal proposal was returned by the attorney general to the Insurance Regulatory and Development Authority of India (Irdai) without any comment. The Street, on the other hand, was expecting a go-ahead. A decision on the merger now rests with the insurance regulator.

Notably, after dipping sharply to a low of Rs 541 intra-day on Wednesday, the scrip recovered some lost ground and closed at Rs 568 or a fall of 8.5 per cent. This could be partly because investors would have used this correction as a buying opportunity, say analysts. Santosh Singh, banking analyst at Haitong Securities, says, “Max is an exceptional franchise with or without HDFC Life. After today’s fall, the stock is not expensive. They are doing really well operationally, too.” He has a target price of Rs 756 on the stock, the highest among analysts. 

Importantly, after tepid growth in annualised premium equivalent (APE) in the past few months, Max Life saw some recovery in growth in March-April. APE helps compare life insurance revenue by normalising premiums into regular annual payments. But, given its slower growth relative to peers, the company has lost some market share. On the other hand, HDFC Life witnessed slowing growth in April, giving away some of the improvement seen in March. 

“HDFC Life had been consolidating for a large part of FY17, which led to market share erosion of 250 basis points year-on-year over the past six months,” says Adarsh Parasrampuria, Banking analyst at Nomura. Analysts attribute some of this to the impending merger of the two insurance companies.

It is important to note apart from elevating the merged entity to number two position in the private life insurance sector, the merger would also entail significant cost synergies. 

In this backdrop, most analysts are positive on Max. In the near term, though, the stock will move in line with the news surrounding the merger.