Home >Markets >Mark To Market >Q3 metrics fire up Max Financial Services stock but sustainability in question

Max Financial Services Ltd’s shares have outpaced those of the most valuable life insurer HDFC Life Insurance Company Ltd in the past three months.

Including today’s over 6% gain so far, shares of the company have surged 20% while those of HDFC Life have gained 13%. The mainstay business Max Life Insurance’s robust profitability metrics amid a pandemic and the progress of the partnership deal with Axis Bank has made investors grab the stock.

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The insurance company’s December quarter metrics seem to have only added to the optimism. Max Life Insurance reported a 65% rise in value of new business for the quarter while margins improved to 28.6%.

It is clear that the company had been able to squeeze more profit out of operations by having a good product mix. In terms of annualised premium equivalent (APE), business growth was 21% year-on-year.

Share of margin friendly individual protection business increased to 10%. from 8% a year ago. But the real deiver was non-participatory savings policies due to the launch of new product.

In essence, Indians have been buying non-participatory savings policies and simple term plans of Max Life more and more. The insurer’s bancassurance tie-ups contributed a large amount of this business too. The growth in new business APE from the bacassurance channel was 15% for the nine months ended December.

The question that investors now need to ask is whether the growth would sustain. The Axis Bank partnership is now in its final stages with only the insurance regulator’s approval pending. Analysts at Kotak Institutional Equities point out that the deal could take several quarters to reach conclusion given its complexity. Nevertheless, Axis Bank has been contributing more than 60% to Max Life’s business. The partnership between the two gives a guaranteed access to the bank’s network. That augurs well for growth in the coming quarters. Even so, analysts believe that FY22 onwards, profitability would normalise. “We expect VNB to normalise downwards and factor Axis’ partnership/shareholding into forecast," wrote those at Jefferies India Pvt Ltd in a note.

Also, weak persistency levels are a dampener to investor sentiment. It says that while Max Life’s products may be flying off the shelves, buyers don’t stick with the company. Insurance is a product where the insurer bears the cost upfront while returns are over a period of time. Weak persistency levels hit future incomes and increase cost inefficiencies.

Shares have been on an upswing given business metrics and the deal with Axis Bank. From here on, valuations need more to sustain.

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