Max India: Diversified but best bet in life insurance space :: Kotak Sec, links

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Diversified but best bet in life insurance space. Max Life (74% of the value in Max
India) will drive superior returns on embedded value or RoEV (16-18%) due to a strong
agency force, banking partner, high persistency and mature traditional business. Max
Healthcare’s shifting focus to profitability from investment offers earnings visibility. Other
businesses may stay in the investing phase in the near term and will be a drag on earnings
and profitability. We initiate coverage with an ADD rating and target price of `450

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Valuation: insurance and healthcare to drive value
Max Life Insurance (74% of SOTP) and Max Healthcare (14% of SOTP) are the main value
drivers. Max Life will add `296 /share and `353 /share of Max India, based on the appraisal
value framework, in March 2015E and March 2016E respectively. We value the life insurance
business at 2X EV assuming NBAP margin of 11% and 23X NBM. We value Max Healthcare at
13X EV/EBITDA.
Max Life: well-placed even as industry limps to growth
We believe control over expense overruns and strong (80%+) persistency will drive RoEV of
16-18% for Max Life. Its strong distribution platform, due to an efficient agency force and large
banking partner (Axis Bank), drove 400 bps market share gain over FY2010-14. We hence find
limited downside to our moderate (12%) premium growth forecast. A mature traditional
business will drive stable earnings in the medium term. NBAP margins (13.4% reported in
FY2014) have limited downside, in our view; higher non-participating policies increase upside
risk.
Max Healthcare: focus on returns
Max India has been investing in new hospitals in Mohali, Bhatinda, Delhi and Dehradun.
However, with the investment phase now behind it, we expect 20% topline growth, driven by
640 bps expansion in EBITDA margins to 14.5% over FY2014-17E as the focus shifts from
investments towards efficiencies and returns. This will be driven by an increase in operational
beds and better utilization.
Risks: heavy dependence on bank partner, weakness in life insurance, investment in initiatives
(1) Heavy dependence on its banking partner (over 50% share in new business in FY2014) in
life insurance, (2) sustained weakness in the life insurance industry, leading to subdued APE
growth and expense overruns, (3) large investments in Max India’s new initiatives and (4) high
promoter pledges are areas of stock sensitivity, in our view.

LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily05122014da.pdf