Max Financial gets re-rated, with Axis Bank-Max Life deal set to fructify

Axis Bank’s plan to purchase a stake in Max Life Insurance Ltd has been a critical event for parent Max Financial Services Ltd, with regards to getting a valuation boost.

The fact that the private lender is now looking at buying a 17% stake, lower than the originally envisaged 29%, hasn’t dampened investor sentiment. In fact, shares of Max Financial Services surged nearly 13% on Tuesday.

Investors are relieved that both parties are willing to make changes to the deal structure, after having a dialogue with regulators.

“We understand that the companies are fairly committed to the deal, which is most critical for Max Life to ensure partnership with its largest distribution partner... Closure of deal and longevity are key to Max’s earnings visibility and a valuation re-rating,” analysts at Jefferies India Pvt. Ltd wrote in a note.

Analysts at Emkay Global Financial Services added, “With Axis Bank acquiring a lower than expected ownership in Max Life, minority holders of Max Financial would remain at an advantage as a major stake of the pure life insurance business will fall in their kitty. This appears to be a positive development and should lift the overhang on the stock.”

As per the original deal, Axis Bank was to buy a 29% stake in the insurance company, taking its total shareholding to 30%. The lender could have then influenced corporate governance at the insurer with the right to appoint directors on the board. Parent Max Financial Services was to hold the remaining 70% stake. The other major stakeholder, Mitsui Sumitomo Insurance, which holds a 25.5% stake would swap shares of the insurer with shares of Max Financial Services.

The second leg of the deal was the listing of the insurance company by merging the parent into it. However, this part could run into trouble with insurance sector regulations, and is likely to have been removed.

That said, for now, Axis Bank is all set to pick up 17% of the insurance company. It brings about 55-60% of Max Life Insurance’s business through its bancassurance partnership.

Of course, now the focus shifts towards the deal’s valuation, and the financial details that are yet to be disclosed by both parties.

The original deal envisaged a cash consideration, but this could change.

Using Monday’s stock price for Max Financial, Max Life Insurance had an implied value of 1.7 times its estimated embedded value for FY21, according to Jefferies.

With the 14% jump, the valuation would now be higher. But it is still far lower than its larger peers such as SBI Life Insurance, HDFC Life Insurance, or even ICICI Prudential Life Insurance that trade at 3-6 times their estimated embedded value. “Clarity on this (Axis) tie-up and its longevity will be key to re-rating,” said Jefferies’ analysts.