Investor's Eye: Update - Max India; Viewpoint - NTPC

Investor's Eye [February 24, 2014]  Sharekhan www.sharekhan.com

Summary of Contents     STOCK UPDATE Max India Recommendation: Buy Price target: Rs296 Current market price: Rs180 Ahead of peers in insurance; healthcare also adds value Key points  In spite of a tough environment, the APE (annual premium equivalent or gross premium adjusted for single-premium policies) of Max Life (a subsidiary of Max India) grew by 14% in the year till date (ie M9FY2014). This is significantly ahead of the 0.5% growth in the APE reported by the private sector players in the same period. The management expects a healthy APE growth in Q4FY2014 as well and may end FY2014 with a 13-14 % growth. What's more, the APE growth in FY2015 is expected to be slightly better since in FY2014 the growth was affected by changes in the regulations of the IRDA. The healthcare business (in which Max India has about a 66% stake) is showing strong traction in revenues and EBITDA while the environment has turned favourable for the health insurance business (Max Bupa Health Insurance Company). Currently, the stock is trading at attractive valuation of 1.1x FY2014 embedded value. We reiterate our Buy rating on the stock with a price target of Rs296.     VIEWPOINT NTPC Regulatory changes affect profitability and valuation multiples  Key points Power sector regulator, CERC, has finalised the tariff regulations (pertaining to period FY2015-19) and the same are quite stringent and against the industry's expectation that the final norms would be toned down (as compared with the recommendations released in December 2013).  Though, as per the new tariff structure, the base return on equity (RoE) has been retained at 15.5%, but the changes incorporated, like linking incentive with the plant load factor as against the plant availability factor earlier, and stringent parameters to consider operating and maintenance cost, interest rate, station heat rate etc, would adversely affect the profitability of the regulated power companies especially NTPC (with relatively lower impact on National Hydroelectric Power Corporation and SJVN).  In case of NTPC, the RoE at the plant level could slide by 650-700BPS whereas at the overall company level the reported RoE could come down to around 10% from the current level of 13-14%. This would essentially result in the de-rating of the valuation multiple for NTPC from 1.2-1.5x (the historic range) to 1.0-1.1x the book value. With its FY2015 book value estimated at Rs113-114 per share, the readjustment in NTPC's valuation is largely factored in after the correction in its stock price. But we see no trigger or reason for a re-rating (or upside) of the stock from the current levels in the medium term. Click here to read report: Investor's Eye   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, The Sharekhan Research Team

 

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