Cabinet approves ordinance on insurance bill… positive for sector however investment will only come after it becomes a law… : IndiaNivesh

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Since the reforms in insurance sector of increase FDI to 49% from 26% was not
cleared in winter session, government has decided to take ordinance route for
clearing insurance bill. Ordinance is a temporary law issued by the president on the
Cabinet’s advice when Parliament is not in session thereby allowing governments
to take immediate legislative action. However ordinance must become a law by
passing in parliament within 6 weeks after opening of next parliament session.
Our Take and valuation
Most of the listed companies having insurance subsidiary has reacted positively
and stocks have moved up on back of this news which has come during market
hours on Thursday, 24th December 2014. However we believe foreign investors will
only increase stake or do fresh investments in sector only after it becomes a law.
Further there is also lack of clarity on management control in these companies if
stake is increased to 49%. In listed Insurance space, we have coverage on Max India
Ltd.
Max Life remains outperformer in private life insurance space despite challenging
business environment in terms of growth in first year premium, increasing market
share based on individual annualized premium equivalents and stable persistency
rate. Further healthcare business continues to show strong traction in terms of
margins and continuous increase in operational bed.
Max India has moved up by 30% / 16% in last 6 months / 3 months on back of talks
about increase in FDI limit in insurance sector. We believe valuation for Max India
has reached its fair valuation and currently we have a hold rating on the stock with
SOTP target price of Rs 367. However if we assign a bull case scenario by giving
valuation based on past deals in insurance sector of ~3x embedded value, then the
SOTP target price will be Rs 465, by valuing Max Life at 3x FY16E Embedded value
and 16x EV/EBITDA Max Healthcare business. However we continue to consider
our base case scenario assumption for valuing the company and maintain the target
price of Rs 367.