{LONGTERMINVESTORS} Stock Update - Max Financial Services; Sector Update - Automobiles

March 02, 2016   Stock Update Max Financial Services Reco: Buy PT: Rs418 CMP: Rs330   Stake sale to Axis Bank to reduce MFS's stake in Max Life; PT revised to Rs418   Key points MFS stake dips to 68% in MLI post stake sale deal with Axis Bank: Max Financial Services (MFS) has sold 4% stake in Max Life Insurance (MLI) to Axis Bank (a consideration of Rs75 crore) leading to a decline in its stake to 68% in the insurance joint venture (JV). While the deal is at a significant discount to the estimated value of the company, it may be to ensure long-term distribution arrangement with Axis Bank which contributes almost half of the premium collections for MLI. After this deal, Axis Bank will hold ~6% stake whereas Mitsui Sumitomo will hold 25% stake in MLI. In the past transaction the erstwhile Max India had allowed Axis Bank to take its stake in MLI with buyback option, though this time there is no information on buyback arrangement. We therefore have tweaked our price target to factor in a decline in the economic interest of MFS in MLI to 68% from 72% earlier. Premium growth to remain steady, operating metrics ahead of peers: After showing a dip in premiums over M9FY2016, the annual premium equivalent (APE) growth has gained momentum (up 21% year on year in January 2016) given the seasonally strong period and resolution of issues relating to corporate distribution channel. With high conservation ratio (85.3%), low expense ratio (22.2%) and high return on embedded value (RoEV; ~18% in FY2015), MLI is amongst the best performing insurance players. The MLI's product mix is superior with lower share of unit-linked insurance plans (ULIPs; par 66% and ULIPs 24% of product mix) and has a strong distribution network in terms of productive agency force and bancassurance tie-up with Axis Bank. Union Budget largely positive, long-term drivers for insurance remain intact: In the Union Budget (FY2017), the government proposed to permit foreign investment in the insurance and pension sectors in the automatic route by upto 49% which is positive for the insurers. In addition, the tax deducted at source (TDS) on insurance commissions paid has been reduced to 5% (from 10% earlier) which will encourage sale of insurance products. From a long-term perspective, the improvement in insurance penetration and increase in financial sector savings augurs well for the sector. PT revised to Rs418, maintain Buy: We have revised our price target downwards to Rs418, mainly to factor in a decline in the economic interest of MFS in MLI to 68% from 72%. Given that MFS is the only pure insurance play available having superior performance metrics, we have valued it at a premium to peers (ie 3x its reported embedded value). We have maintained our Buy rating on the stock.   Sector Update Automobiles MHCV delivers strong growth, PV remains soft The passenger vehicle (PV) sales in February 2016 continued to remain under pressure with the largest domestic car maker, Maruti Suzuki India Ltd (MSIL), posting flattish sales numbers for the month. The other car manufacturers including Tata Motors (TAMO) posted a decline of 20.4% in the PV segment in the domestic markets. The two-wheeler volumes were buoyant with the industry leader Hero MotoCorp Ltd (HMCL) registering a growth of 13.7% YoY, primarily due to a lower base of February 2015. With increased focus on the rural areas (as per budget for 2016-17), the volumes for HMCL are expected to revive in the coming months. Royal Enfield (Eicher Motors) registered a second consecutive month of strong growth of 62.6% YoY. The commercial vehicle (CV) segment continued to grow on the back of higher growth from the medium and heavy commercial vehicle (MHCV) segment due to the replacement demand and some pick-up in road construction and mining activities. The light commercial vehicle (LCV) segment apparently registered a growth for the fourth consecutive month, driven by new launches, replacement demand, high discounts and steady fuel prices. The CV industry majors TAMO and Ashok Leyland Ltd (ALL) have registered an improved volume growth of 22% and 31.2% YoY respectively in the MHCV segment. The tractor segment major Mahindra & Mahindra (M&M) registered a growth of 23.7% on a Y-o-Y basis on the back of improved demand from the domestic market. Key takeaways from the month's performance The market leader, MSIL, registered flattish volumes for the month of February 2016. The agitation by the Jat community adversely affected the production at both the plants of the company. The recently launched Baleno continues to generate incremental demand for the compact car segment. The exports of the premium hatchback have been commenced as well. Contrary to MSIL, Hyundai reported a strong set of numbers for the month of February 2016, registering a growth of 9.1% YoY. The company's new launches like Creta, i20 and Grand i10 (upgrade) helped in gaining traction in the sales volumes for the month. The utility major, M&M, registered a 27% Y-o-Y rise in the utility vehicle (UV) segment. The new launches KUV100 and TUV300 drove the sales volumes for the company in the month of February 2016, with KUV100 registering bookings of 27,000 units. The total PV segment for M&M grew at 26% YoY to 23,718 units. TAMO registered a decline of 20.4% YoY in the PV segment in the domestic markets. The company has pushed back the launch of Tiago, earlier named as Zica to March 2016. The new launch might aid volume revival for TAMO in the passenger car segment. Bajaj Auto and HMCL, the two leading two-wheeler manufacturers, reported a volume growth of 8.9% YoY and 13.7% YoY respectively in the motorcycles segment on the back of a pick-up in demand. Royal Enfield (Eicher Motors) registered a super normal growth of 62.6% YoY, the second consecutive monthly growth in excess of 60%. Motorcycles with engine capacity upto 350cc registered a growth of 65% YoY while the motorcycles with an engine capacity exceeding 350cc posted a growth of 45% YoY. The total two-wheeler sales for TVS Motor Company (TVS) grew by 8% YoY aided by 3.8% Y-o-Y growth and 18.2% Y-o-Y growth in the motorcycle and scooters segments respectively. The scooters segment continued to attract incremental demand. The CV segment continued to be driven by the growth in the MHCV segment, triggered by the replacement demand and potentially some new demand from the road and mining sectors. The LCV segment registered a fourth consecutive month of growth. If in case the growth sustains in the coming months, a revival in the demand in the LCV segment seems likely. The MHCV majors, TAMO and ALL, have posted 22% and 31.2% Y-o-Y growth respectively for the month. Eicher Motors has registered yet another month of strong volume sales, growing by 53.7% YoY in the domestic CV market. As per the management, the construction segment posted a 40% volume growth for the month of February 2016. In the tractor segment, the market leader M&M reported a 23.7% growth in the domestic volumes however Escorts posted a decline of 3.9% YoY in the domestic markets. Picks: We continue to prefer MSIL, HMCL and ALL among the auto stocks under our coverage.   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. Regards, Sharekhan Fundamental research team www.sharekhan.com

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