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Executive president Rahul Khosla maximises the rise in Max Financial by selling stock worth ₹72 crore

If a stock gains after announcement of a merger, when the merger is called off it should tank, logically speaking, but by how much? In the case of Max Financial Services, from the time rumours about its potential merger with HDFC Standard Life surfaced in June 2016 to a couple of weeks after the official announcement on August 8, 2016, the stock gained a whopping 62%. The stock continued to scale new highs all the way till May 2017 when rumours about the deal not cutting ice with the regulator emerged. Over the next few months till July this year when the official announcement came through, the stock lost only a third of its gain triggered by the merger news. Not withstanding a failed deal, the stock is on a roll.

Riding the optimism Rahul Khosla, executive president of Max Financial Services has sold Rs.65 crore worth of shares of Max Financial Services since March 20. The latest transaction on September 15, involved a disposal of stock worth Rs12.63 crore. Khosla also sold stock worth Rs.1.59 crore in Max Ventures and Industries on September 18 and Rs.5.36 crore in Max India on February 20.       

Year-to-date, the stock is up 16%. That is probably a clear indication that the market continues to believe that the company will strike a deal sooner or later as it failed only on account of a structure that did not receive the regulator's approval. HDFC Standard Life was gunning for an IPO and did not want to delay its public offer on account of the merger. Officials of HDFC Standard Life were even quoted saying they will be open to reviewing the deal at a later stage but the current rumour is that Max is in talks with Birla Sun Life.

Investors always suspected a change of ownership at some stage in Max’s life insurance business considering that promoter Analjit Singh has been a serial entrepreneur, creating strong franchises and selling them when the business was ripe. Max has built a strong record in life insurance too. Over the past five years, the insurance firm’s net sales recorded a healthy CAGR of 12.27%, while its profit recorded a CAGR of 20.05%. The gross written premium also reported a healthy growth of 17% last fiscal, increasing to Rs.10,780 crore (FY17). The firm’s conservation ratio, an indicator of client retention, witnessed a steep improvement to 92% in Q1FY18 against 86% in Q1FY17. The company however reported a 38% decline in net profit due to one-off gains realised in Q1FY17.  

Over the past one year the stake of the promoters marginally decreased from 30.45% as on quarter-ending June 2016 to 30.42% as on quarter-ending June 2017. On the other hand, mutual funds have steeply increased their stake in the firm, from 16.71% to 21.81%, during the same period (the deal was called off in July, and fund holding post the announcement is not yet public). FPIs marginally reduced their stake to 29.64% from 30.69% during the same period. Analysts reckon that a strong distribution channel, increased traction on the online channel, strategic partnerships with Axis Bank and Yes Bank along with the possibility of a merger in the future will be key drivers for growth.