This Midcap Insurance Stock Showing Upside Potential, Sharekhan Recommends Buy

Uncertainty uplifted on partnership with Axis Bank

Axis Bank announced that it will buy the balance ~7% stake in Max Life from Max Financial at a fair market value using discounted cash flows (DCF) instead of valuation as per Rule 11UA of the Income Tax Rules, 1962. The revision in valuation has been done consequent to the guidance received from IRDAI (Insurance Regulator). Axis Bank is now set to own a 20% stake in Max Life, uplifting the uncertainty on the transaction. Max Financial will get more money for its stake in Max Life. The promoter recently reduced the stake in Max Financial, down to ~13% from 14.7%. Now higher dividend could help promoters reduce debt.

Background

The deal was first announced in 2020, under which Axis Bank proposed to acquire a 29% stake in Max Life Insurance and consequently got the approval for acquisition of a 20% stake. The bank then acquired a 12.99% stake in Max Life at Rs. 35 per share with the right to acquire an additional 7% stake in the company. This was based on valuation as envisaged under Rule 11UA of Income Tax Rules. In October 2022, last year, the Insurance Regulatory and Development Authority (IRDAI) had imposed a penalty of Rs 3 crore on Max Life and Rs. 2 crore on Axis Bank due to violations of valuation rules in the proposed deal, as IRDA noted that the promoters of Max were engaging in the transfer of shares of the insurer to Axis Bank at a price, which is substantially lower than the fair market value. Consequently, IRDA asked the bank and Max Life to revise their valuation methodology for getting approval. Thus, Axis Bank entered into a revised agreement to buy the balance 7% stake at FMV using DCF vs. earlier valuation rule as per Income Tax.

Transaction value expected to be higher and closer to the Fair Value

The bank has not disclosed the revised valuation. However, we expect the revised valuation for the balance 7% stake should be atleast ~Rs.22 billion (i.e Rs.166/- per share of Max Life because as per the annual report 2022, Max Financial acquired 0.74% stake of Max Life from Axis Bank at Rs.166 per share during March 2021), which would be higher by ~Rs. 18 billion compared to the earlier transfer price.

Valuation - Maintain Buy with an unchanged PT of Rs. 1,020/share

Max Life has increased its focus on the non-PAR segment along with the protection segment, which currently forms ~51% of total APE (vs. ~16% in FY2017). Growth in non-par savings continues to witness strong momentum, led by the annuity business. Group protection is seeing a decline due to pricing pressure in GTL policies, while individual protection is expected to do better. The company is increasing its focus on annuity and protection, which would support the overall growth momentum. It has been on-boarding newer bancassurance partners and new-age digital players, which would not only help diversify the mix but also provide higher sales capacity for it. Hence, we believe sectoral tailwinds may result in providing a positive trigger for improving growth metrics going forward. MLI generated stable operating RoEV (of 15.7% in H1FY2023) and has sufficient capital (solvency ratio of 196%). We believe now the key catalyst would be the reverse merger of Max Financials with Max Life Insurance along with the listing of Max Life. Valuations are inexpensive, factoring some uncertainty about the event.

According to Sharekhan, the Key Risks are Muted demand and Any adverse regulatory policies/guidelines may affect its profitability.

Disclaimer

The stock has been picked from the brokerage report of Sharekhan. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.