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Max India -Protecting profitability
During 3QFY11, Max India reported standalone loss of Rs69m, but turned
profitable on consolidated basis led by life insurance business. With new
norms on Ulips laying caps on charges, management has shifted focus
from premium growth to profitability. It is taking steps to lower costs and
improve productivity, but this will lead to modest premium growth. In
spite of these measures, NBAP margins will decline to 12-14% (from
20% in FY10) and corroborate our view that smaller players will see
greater impact on NBAP margins, than those with economies of scale. We
value insurance business at 12x NBAP. With target price of Rs190; BUY.
Moderating growth targets…
Management of Max New York Life (MNYL) believes that the new IRDA norms
will have a significant impact on their new business premium (NBP) growth.
As a result, in spite of the recent tie-up with Axis Bank that expanded their
distribution network and access to client-base, management expects 0-10%
growth in NBP in FY11 (7% in YTDFY11 vs private sector’s decline of 10%).
With focus on cost control and streamlining of distribution network over FY11-
12, NBP growth is likely to remain modest in FY12 as well. Thereafter, MNYL
is targeting 15-20% growth in NBP and rise in share of traditional insurance.
… and focusing on cost controls and productivity improvement
There is a clear shift in focus from growth to cost control and productivity
improvement. In this direction, management has (1) cut agents by ~30% to
~55K, (2) nearly halved the commission rates on Ulips and (3) is also cutting
/ optimising on distribution related costs. As a result, management sees
~30% reduction in operating costs over FY12, albeit with one-time cost of
Rs1.3-1.5bn in FY11 (10-12% of costs), even as premiums grow marginally.
Initiatives are being taken to improve conservation ratio (currently at 78%).
Sharp cut on NBAP margins to 12-14%
Management believes that NBAP margins are likely to stabilise in the range of
to 12-14%, a sharp decline from 20% in FY10. The sharp fall in MNYL’s NBAP
margins (higher than 300-400bps cut estimated by peers like ICICI Pru Life
and HDFC Life) reflects on its high charge structure (allocation and surrender)
prior to announcement of new norms. Cost-overruns may get eliminated by
CY14, but MNYL should not need fresh capital infusion. We expect NBP to
grow by 5% in FY11-12 and then by 15% in FY13; NBAP margin could be at
12% from FY12 onwards. We value stake in life insurance business at Rs39bn
(Rs149/ share) based on appraisal value, including 12x on FY13CL NBAP. We
lower our SOTP based target price to Rs190. Maintain BUY.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Max India -Protecting profitability
During 3QFY11, Max India reported standalone loss of Rs69m, but turned
profitable on consolidated basis led by life insurance business. With new
norms on Ulips laying caps on charges, management has shifted focus
from premium growth to profitability. It is taking steps to lower costs and
improve productivity, but this will lead to modest premium growth. In
spite of these measures, NBAP margins will decline to 12-14% (from
20% in FY10) and corroborate our view that smaller players will see
greater impact on NBAP margins, than those with economies of scale. We
value insurance business at 12x NBAP. With target price of Rs190; BUY.
Moderating growth targets…
Management of Max New York Life (MNYL) believes that the new IRDA norms
will have a significant impact on their new business premium (NBP) growth.
As a result, in spite of the recent tie-up with Axis Bank that expanded their
distribution network and access to client-base, management expects 0-10%
growth in NBP in FY11 (7% in YTDFY11 vs private sector’s decline of 10%).
With focus on cost control and streamlining of distribution network over FY11-
12, NBP growth is likely to remain modest in FY12 as well. Thereafter, MNYL
is targeting 15-20% growth in NBP and rise in share of traditional insurance.
… and focusing on cost controls and productivity improvement
There is a clear shift in focus from growth to cost control and productivity
improvement. In this direction, management has (1) cut agents by ~30% to
~55K, (2) nearly halved the commission rates on Ulips and (3) is also cutting
/ optimising on distribution related costs. As a result, management sees
~30% reduction in operating costs over FY12, albeit with one-time cost of
Rs1.3-1.5bn in FY11 (10-12% of costs), even as premiums grow marginally.
Initiatives are being taken to improve conservation ratio (currently at 78%).
Sharp cut on NBAP margins to 12-14%
Management believes that NBAP margins are likely to stabilise in the range of
to 12-14%, a sharp decline from 20% in FY10. The sharp fall in MNYL’s NBAP
margins (higher than 300-400bps cut estimated by peers like ICICI Pru Life
and HDFC Life) reflects on its high charge structure (allocation and surrender)
prior to announcement of new norms. Cost-overruns may get eliminated by
CY14, but MNYL should not need fresh capital infusion. We expect NBP to
grow by 5% in FY11-12 and then by 15% in FY13; NBAP margin could be at
12% from FY12 onwards. We value stake in life insurance business at Rs39bn
(Rs149/ share) based on appraisal value, including 12x on FY13CL NBAP. We
lower our SOTP based target price to Rs190. Maintain BUY.
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