Max Financial Services Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Q3 margin spike is a product-launch mirage: VNB margin hit 39%, but management called it "artificially high" and not sustainable, driven by a one-off non-PAR mix surge above 55% from the SWAG launch.
• Banca channel remains the drag: 9M APE from bancassurance de-grew ~9% as open architecture bit fully; the counter-share base effect is now almost over, and management expects growth to return in Q4.
• Axis Bank relationship is stabilizing, not recovering: Max Life's share at Axis Bank has held near 70% since January 2022, and management does not expect a return to 80%; the 7% stake acquisition by Axis is keenly awaited but has no timeline.
• Proprietary channels are the growth engine: Agency and direct channels grew 18% in 9M, with 38% YoY improvement in agent recruitment; online savings grew 4x YoY on a new short-term product.
• What to watch next quarter: Whether banca growth actually returns in Q4 as guided, how quickly the non-PAR mix rebalances toward the 40% target, and any concrete timeline on the Axis Bank 7% stake acquisition.

Banca Channel & Axis Bank Dynamics

• 9M de-growth of ~9%: The full-blown impact of open architecture and a general slowdown in banking channels drove the decline; the base impact of counter share is now almost ended.
• Axis Bank share stabilized at ~70%: Share has been maintained close to 70% since January 2022; management expects it to stay around 70% plus/minus 2-3% and does not see a return to 80%.
• People deployment at 60:40: Management intends to improve this ratio and is committed to more investment; achieving 70% counter share with 60:40 deployment is described as credible and a sign of good ground execution.
• Alternate Axis channels being built: Ramping up corporate banking for business insurance, call centre lead generation, Bharat banking, a direct salesforce for customers without relationship managers, and D2C capability on Axis Bank counters; these channels are expected to deliver INR 200-250 Cr this year.
• Open architecture framed as opportunity: Management is aggressively working to partner with as many banks as possible and does not anticipate a big depletion of counter share at Axis Bank.

Tripathy: "I think we should see this as more opportunity than risk. We are signing up with new banks, with Axis Bank becoming our promoters and they are telling you what you should expect in terms of counter share. I am not anticipating that there will be big depletion of the counter share at Axis Bank."

Product Mix & Margin Sustainability

• Q3 non-PAR mix spiked above 55%: The SWAG product launch drove non-PAR share well above the 35-40% target; management called the resulting 39% VNB margin "artificially high" and not sustainable.
• Rebalancing will take a couple of quarters: Non-PAR mix is expected to fall back to near 40% next year or a couple of quarters down the line, with more diversion toward participating and ULIP products; Q4 will also be a bit higher on non-PAR but with a waning effect from the sharp Q3 number.
• VNB margin range guided at 27-28%: Over the next couple of years, margins are expected to settle in this band; the 9M margin of 31.8% benefits from the current elevated non-PAR mix.
• Margin improvement is a mix play: The lift is largely coming out of non-PAR, and even though bank sales volumes are lower, the overall non-PAR mix is higher, supporting the margin profile; participating design margins also improved because of a product launched last financial year now running through the full year.
• Assumption review was neutral: The financial year assumption review has been concluded and accounted for in Q3; overall assumption changes have not changed margin profiles materially, with pluses and minuses netting out and no gain coming from assumption change.

Amrit Singh: "...the 39% that you see is artificially high this quarter. And hopefully, as we move forward it will get rebalanced. So, 39% is not a sustainable number going forward."

Proprietary Channel Growth

• 19% APE growth in 9M: Driven by strong growth in both online and offline proprietary channels; online channels grew 26%.
• Online savings grew 4x YoY: An industry-first short-term savings product with best-in-class returns led to about 100% growth in savings run rate; the online channel leveraged this smart fixed return product to drive robust premium growth on the savings side.
• Offline channel grew 18%: Supported by growth in agency and direct channels; the "Way of Working" (WoW) program with a consulting partner was launched to build discipline on input vectors.
• Agency recruitment up 38% YoY: New agent performance improved 21% in Q3; a 3-year agency transformation program with a renowned consulting partner is underway, with guidance from shareholders and the board to invest in agency over the next few quarters.
• Direct channel productivity up 17%: Frontline seller headcount grew 11%.
• Growth vs margin trade-off acknowledged: Over a short period, the company will have a bias to compromise a little bit of margin to achieve higher growth via build-up of the offline proprietary distribution channel.

Tripathy: "So over a short period of time if we were to compromise a little bit of margin to achieve higher growth via build-up of offline distribution channel, our own proprietary distribution channel. The company will have a bias to do that."

New Products & Segment Expansion

• SWAG became the most successful product in Max Life history: Fastest to scale up to about INR 300 crores, with stellar response across all distribution channels; it offers first-to-industry flexibility on customized paying terms, policy term, income start date and income period.
• Protection segment expanded to new customer groups: NRI, homemakers and self-employed customers now contribute about 20% of term business on a run-rate basis; two new protection plans were launched in Q2 focusing on self-employed individuals.
• Annuity business grew more than 300% in 9M: Growth is coming mostly from offline channels; the current annuity offering was strengthened with flexibility of premium payment terms and extended entry ages.
• ROP mix static at ~15%: This is a reduction over the prior year period, but protection growth remains flattish; management can only share optimism on potential growth, with discussions with reinsurers ongoing and a need to strike a balance on price relaxation and underwriting grid.

Profitability, Costs & Capital

• 9M PBT improved 66% to INR 438 crores: Consolidated PAT up 129% to INR 399 crores; Max Life PAT at INR 376 crores.
• New business strain down 38% vs APE down 5%: The reduction is driven by a mix of channel elements including some improvement in the strain profile of non-PAR designs, with benefit coming from the new product launched.
• Policyholder opex improved to 14.3% from 15.1% YoY: Cost ratio improved despite deploying more people; benefits came on the non-distribution side from variable sales elements (overall sales being lower) and health and protection being lower, where medical costs and stamp duties are involved.
• Solvency ratio at 200%: Management is open to holding more capital if needed for higher non-PAR business.
• No dividend from Max Life to MFSL: Max Life intends to retain profit profiles to continue supporting growth aspirations.

Distribution Expansion & Transaction Update

• MFSL acquired balance 5.17% stake in Max Life from MSI: This takes MFSL holding to 87%, the second-last step in the plan to sell up to 20% equity to Axis Bank and its subsidiaries.
• Axis Bank 7% stake acquisition repriced: Revised agreements give Axis Bank and its subsidiaries the right to purchase the balance 7% equity stake at fair market value using discounted cash flow method instead of valuation under rule 11UA of income tax rules; the revision was made consequent to guidance received by Max Life from IRDAI.
• New distribution tie-ups: Tied up with Ujjivan Small Finance Bank and entered into relationships with two new brokers from a renowned financial services group in Q3; contribution from these partners is expected to become meaningful in coming years.
• Max Life Pension Fund Management received POP license: This enables point-of-purchase distribution for pension products.

Amrit Singh: "So there is keen interest at Axis Bank to do it as fast as possible but there are certain internal process that they are working towards. At this point in time it will be very difficult for us to indicate any timeline to you except for the fact that Axis as a shareholder there is a keen interest to do it as quickly as they can."

Guidance & Commitments

Key Metrics