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Max Financial Services Ltd
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Ladies and gentlemen, good day, and welcome to the Max Financial Services Limited Q1 FY '19 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Mohit Talwar, Managing Director at Max India -- sorry, Max Financial Services. Thank you, and over to you, sir.
Thank you, and welcome, everybody, on this quarterly earnings call. I'd like to introduce my colleagues. I've got Prashant Tripathy, who's the CFO for Max Life; and Jatin Khanna, who handles Investor Relations for the group. So very briefly, I'll just talk about MFS to start with before we get into Max Life's performance. So we saw a 21% growth in Max Financial. Revenues touched INR 3,099 crores with consolidated PBT at INR 51 crores, however, down by about 41%. And that was due to some one-off expenses, mainly relating to the IDBI Federal acquisition, which we had bid for and then subsequently pulled out of. Also, which added to a lower profit had been higher protection business and a shift in product mix.Moving on to Max Life. MCEV on an operating basis has grown 15% annualized to INR 7,645 crores. Due to sales seasonality and investments made in proprietary channels, the impact of cost overrun is higher for Q1, leading to lower RoEV than last year. However, the full RoEV is expected to be in line with historical trends.NBM for quarter 1 is 23.5% before cost overruns, and this has improved 130 basis points over the previous year, and it's 18.1% post overrun. On a full year basis, NBM is also expected to be in line with historical trends.Value of new business, post overrun, has grown by 17% to INR 101 crores. Individual APE has grown at a strong 17% to INR 552 crores, with a bias towards traditional and protection products. While we have experienced a strong growth across channels, our proprietary channels growth at 19% has exceeded banca growth at 16%. Continuing our strong focus on digital, the eCommerce channel has also grown 93%. Online ULIP has been launched to gain further market share in the online market. Protection sales, including individual and group, this has grown 48% year-on-year, resulting in improvement in protection mix, from 13% in quarter 1 of '18 to 16% in quarter 1 of '19. Individual protection mix improved from 6% to 7%. And group protection mix improved from 7% to 9% during the quarter. GWP, that is gross written premium, grew a strong 16% to INR 2,320 crores. 16% growth in renewal premium, it touched INR 1,554 crores, led by a record improvement in conservation ratio to 91%, which is one of the highest in the industry.Trends in expense ratios and conservation and persistency all continued to show a healthy year-on-year improvement. Claims settlement ratio at 96.3 is best-in-class. Solvency surplus is at INR 1,911 crores, with solvency ratio at 262%. Assets under management as of June '18, stood at INR 53,940 crores, which is a growth of 18% year-on-year.Max Life, recognized as being amongst India's best companies to work for in 2018, is #1 in the life insurance and top 15 in BFSI space and a top 50 company in India. Briefly, I'll just talk about the progress towards some of the strategic priorities. We have started investments in proprietary channels to build robust multi-distribution architecture. We plan to invest around INR 170 crores as OpEx and around INR 60 crores as CapEx during this year on expansion of proprietary and digital. We also plan to open 145 new agency offices during this year. Funding for all this expansion will be through internal accruals, so there will be no dilution. We plan to add 36,000 new agents every year over the next 3 years and increase our agency offices from 205 to 350 over the next 12 to 18 months. We will aspire to grow these channels to be around 35% CAGR over the next 3 years to get a more balanced channel mix and get a 35% to 40% contribution from these proprietary channels.Max Life agency channel is one of the few agency channels that delivers positive margins. We will continue to strengthen our market leadership in online sales because of consistent pricing advantage, powered by strong underwriting capabilities. We will continue our efforts of deeply integrating with our bancassurance partners and build capabilities across products, marketing and technology, while continuously attempting to acquire new partners. There will be a focus to pursue a more balanced product portfolio with a bias towards protection segments, which you will have noticed in our products mix shift as well. With significant investments in proprietary channels, sustained improvements in cost ratios and improvement in protection mix, we are progressing towards our aspirations of a 25-25-25 target on EV, VNB and growth over the next 3 years.So to sum up, Max Financial Services is on course to drive strong shareholder outcome via its new strategic plan. There's a 3-pronged strategy in play on addressing channel concentration risks that would play in the mind of investors: aggressively grow our proprietary channels; retain and grow existing partners; and pursue inorganic opportunities to balance out the channel mix in a shorter time frame.On that note, I'd like to hand back to the moderator and open the floor for questions and answers. Thank you.
[Operator Instructions] Our first question is from the line of Madhukar Ladha from HDFC Securities.
Sir, my first question is regarding your group business. Can you break it down between the various components of it, so the credit protect, group term insurance and group funds business?
Yes, okay. The answer to your question is if you look at the 9%, that is coming from growth. And then 1% of that, which typically comes in form of single premium, so 1% is APE adjusted premiums comes out of credit protect. And the balance, 8%, comes from the retail business, which is repeatable. And there is nothing that we do or quite insignificant in group funds business. So that's the computation.
Got it. Sir, and the second question, more on Max Financial. You've paid out slightly over INR 27 crores for arranging the funding for IDBI Federal. That seems a little bit on the higher side. Can you explain that? And probably also tell us whom did we pay this to? Or were there any bankers involved in between for this?
Okay. So in order to organize this funding, we were to reach out to bunch of lenders, because initially, we were wanting to sort of tie up these funds from private equity investors, wherein the binding commitments which were required as part of the process were difficult because an equity investor can really sort of give a binding commitment only for an equity term. So now which therefore, we had an implication in terms of pricing guidelines and things like that. But the transaction timeline were not very clear. So we already reached out to few lenders to organize funds. And we ended up sort of organizing, really, more than what was required. And this fee is about 0.5% of what we could organize in terms of the funding requirement for the bidding.
Let me give it a little bit more color here. See, as far as the IDBI Federal deal was concerned, right, as you all know, we were 1 of the 2 companies who were shortlisted. At the final stage, what was required of the bidders was to actually confirm in writing, with a fully binding underwritten offer, arranging for funds. So there was a syndicate which had given us a fully underwritten offer. And as you know, any underwritten offer will entail a fee. And these are not very large amounts. But then the amount which are being raised was substantial. So that's the amount which is something, which you -- anyway you have to pay, irrespective of whether a deal goes through or not. Had the deal gone through, this would've been adjusted against the overall pricing. Unfortunately, we pulled out of the deal and for right reasons, of course. So this is something which is committed and had to be paid. And it's really a one-off.
Got it. Sir, you've reported 15% RoEV for the quarter and you've also disclosed INR 7,706 crores of MCEV for fourth quarter, while the first quarter's EV number is actually down. I understand that there is a dividend adjustment in this. But there is a little bit of a gap, and my calculations suggest that it's about INR 153 crores. Can you explain that? Probably, it's economic variance or other variance.
Yes. So let me just give you a quick reconciliation. So from the INR 7,706 crores, we paid out INR 197 crores of dividend. So even during the disclosure, we had reported that with the dividend paid out, the number will be INR 7,509 crores. INR 7,509 crores goes up to INR 7,645 crores, but if you were to compute 15%, then there will be a little bit deficit, about INR 137 crores. That comes predominantly because the movement, which is mark-to-mark in nature in the shareholder fund as well as in policyholder fund. And that both is around INR 50 crores in shareholder and the balance, about INR 90 crores in the policyholder fund, which is really nonoperating in nature. Now the big question is if we are making adjustments here, it should show up in the margins. And just to very quickly update you, that our methodology of the VNB or margin computation is on the basis of period beginning curve. Now we all know that the curve has moved quite significantly during the quarter. So in the period beginning curve, that's the curve that has been used for margin computation. However, for the computation of EV, we ended up using the period ending curve, which is exactly the methodology that we have always followed. So the good news is when we come to the next quarter and we start to pick up the curve, the new curve, which has moved across the course by about 60 to 80 basis points, versus the margin numbers that we have disclosed, you should see an uplift of about 80 basis points to the margins that we have given. So just to explain to you clearly, if we were to use the curve as of end of the period, then the margin that we have shown as 18.1% would have been closer to 19%. However, this is the methodology we have followed, and it gets reconciled over a period of time.
[Operator Instructions] Our next question is from the line of Avinash Singh from SBICAP Securities.
Two questions. One, on your protection, so if I just look at Slide 10, so the number of policy on the individual side have gone up by 28%, but the premium growth on individual is 45%. So I would like to just understand that okay, is it the effect of ticket sizes going up because of the sum issued? Or like, also there's some sort of pricing effect? I mean, if you can provide some color. And second question, something I missed on the pay protect, the group part, that 9% breakup. What exactly was the 1% and 8%? Because I just -- neither were clear to me. So -- and thirdly, in terms of your expenses or other expenses, less investment in your digital, less proprietary channels, opening new branches, if you can just again, provide some numbers again. And how -- what kind or what sort of impact you assume in sort of a new business growth? What's sort of -- I mean to say, the margin impact you will see because of this?
All good questions, Avinash. I'll just go one by one and answer your questions. So your observation is correct. We are observing our ticket size, which is a bit higher than how it was last year. So from -- close to about 11,000 to 11,500. So 11,000 to 11,500 range of ticket sizes. This year, we are writing more in the range of 12,500 to 13,000 range. So there is an upside on the ticket size. And hence, you will notice that on number of policies we have grown 28%. But on the total premium on protection, we have grown closer to about 45%. That's the first question -- first answer to your question. The second one was on the total protection business. As you can see, we have declared this as a 16% number. Of that, 7% comes from individual business, which is the retail part. These are individual policies that we understand are selling. And then you will see on group side, about 9%. Now group actually has largely 2 different colors of policies that we end up selling. One is the credit protect part, and the other one is group term life. Now credit protect is an insurance for the people who are taking mortgage, and GPL generally is given to corporates for covering their employees or large groups. So the breakdown of 9% within group is actually 1% of credit protect and 8% of GPL. The third question that you asked about, the color on expenses, yes, you are right. Even when we began the year, as a part of our last call, we did explain that we are embarking on a journey to expand our proprietary channels. And we had carved out about INR 170 crores of additional expenses towards ramping up our own channels. Now our own channels means 7 or 8 different initiatives that we are trying to raise. Some of them are agency-like, but the investment also goes towards enhancing our presence in the digital space, experimenting as well as ramping up other channels which are non-agency like. And as we speak, there are 8 different initiatives that we're pursuing. The first quarter expense that we've incurred is broadly in the range of about 10% to 15% because we just began it in the month of April. As we move ahead, these expenses that we'll incur now at a very high level, about INR 110 crores to INR 120 crores, will go towards setting up offices, hiring new people and different line staff who will be responsible for sales. There is balance of INR 50 crores which has been carved out for driving protection businesses as well as savings businesses through Internet as well as the costs that will come in form of marketing, in form of new things that we'll be doing as well as additional expenses that you end up incurring while writing protection, which is more like medical charges, et cetera. So this INR 120 crores -- INR 170 crores is a breakdown of INR 120 crores, which is going towards agency-like. And the balance, INR 50 crores, towards driving digital as well as the new initiatives that we have picked up as a part of our growth exercise.
Yes. So it means -- I mean, of course, the 3-year plan. But as you highlighted that okay, typically, in the next 12 to 18 months, you'll be off setting your branches and also the protection part will be sort of front-loaded. So we can expect large part of this INR 170 crores to be a spend over the next 4 quarters -- 4 or 5 quarters?
I will say so. In the range about INR 130 crores to INR 150 crores, most definitely. On your question, the one that you asked saying what will be the impact on margin, so like we gave you a kind of forecast, which -- really very hard to tell the exact number. But we're anticipating that with all these expenses incurred and its effect on overruns counted, we -- our margins will be in the similar range as we kind of had last year, last full year. So we are looking at the number which is closer to about 20%.
But what's important to note here, Avinash, is that on a structural basis our margins have expanded. And as we start sort of cleaning up and growing faster and our expenses on expansion get absorbed, then you will see a very sharp margin improvement and the bridge to -- or the pathway to reach the structural margin did not -- so like 5 years or a decade. It's like over the next 3 years. So therefore, at least from a trend standpoint -- trend line standpoint, our structural margins have improved, have become very robust. And we hope to get there very soon -- growth expansion.
So Avinash, that links to the 25-25-25 strategy. So that's really the road map. We first get to 25% on a structural basis and then we ramp up the business to make sure that we get the leverage. So that on net overrun basis, we get to 25% within 3 years' time.
Okay, okay. Sir, on that -- sorry to -- again, I mean out of these, again, some investment because you will be opening your branches, hiring more staff, so that are some again are recurring part of costs? Of course, I am mindful of the fact that okay, that will drive the business overall. So how much of this sort of I will add to the recurring costs? Because out of this INR 170 crores, eventually we will end up sort of paying rents for the offices and the staff salary. And on that, I mean, typically if we are going to end up the FY '19 at, again, around somewhere 20%, so that it's 3-year, to us, 25% starts from March '19? Am I right?
So just to correct, some of these costs are going to be recurring because it's going towards rental, it's going towards hiring employees. The only thing that we are doing is to leverage our current infrastructure to a great extent. So of these 145 offices, about 60 odd offices, which are office units, they are being opened in our current offices by carving out space for the new office units. So we will do whatever it takes to make sure that the expenses are minimized, and it remains in the zone of variable-izing the expenses as much as possible.
And see, Avinash, the expenses will be what they are. I think what's important is that the expenses will produce sales. And as that sales growth catches up, these expenses will get absorbed automatically within that sales growth. So then you will not see any overrun from the expenses.
[Operator Instructions] Our next question is from the line of [ Ahmet Dhizani ] from Zenith Capital.
I was just seeing that in FY '17, we did not have any cost overruns. But this quarter, we have cost overruns. Can you tell us what the nature of this cost overrun is and what -- how long are they expected to continue?
Yes. You may note Ahmet, that this is the first time we are disclosing the number on a quarterly basis. Otherwise, typically, you would see our disclosure at the end of first half year. The way life insurance business works is about 15% of sales comes in the first quarter. That's the nature of the business. It is quite seasonal, and a large part actually comes in quarter 3 and quarter 4. So the proportion of sales in quarter 1 is lower. However, a large part of our costs, other than the commission costs, is fixed in nature because you have people deployed at agency, et cetera. And we typically end up incurring 21% of our total management expenses in the first quarter itself. So generally, there is a gap in quarter 1 because of seasonality issues. And hence, quarter 1 will generally have an overrun. So we do have an overrun. It was there even for last year's first half. So this, we'll compare apple-to-apple, we have our INR 20 crores overrun in the first quarter last year. And we have about INR 30 crores overrun this year. That additional INR 10 crores is happening predominantly because of the additional expenses that we are incurring towards the growth, the one that we described. Because in agency-like channels, you had to make the investment upfront and they start to actually get ramped up in 6 months to 9 months. So as we move along through the year, some of these overruns will get auto-corrected as sales start to pick up and the seasonality moves in the zone of higher sales quarters.
Right. So this INR 120 crores that we are expected to spend, that will -- INR 170 crores, sorry, that will be over 3 years. So I'm guessing it's about INR 60 crores a year. This will be included in cost overruns?
First of all, your observation that it is going to be over 3 years, that is not correct. Actually, these will be pretty much yearly costs. So in year 1, for example, we'll be outlooking something like INR 120 crores, which will progressively increase. They will, of course, be a part of overrun. But you must remember that as sales start to pick up, you'll have more sales come up, which produces allowables. So overruns actually will reduce.
Okay, so this does not affect our VNB margin pre cost overrun? This will come post the cost overrun margin, this INR 170 crores a year?
Yes, a part of that which is not covered by the sales. So in the initial year, and like I will mention, that in year 1, we will, as part of our business plan, we were hoping to be in the range of 19%, 20% because of these additional expenses that we're incurring. It appears to me, at this point of time, that we'll be more towards 20% than 19%. So we will maintain our margin while we continue to incur these expenses to drive the growth for the business.
So 20% post cost overrun margin is what we are guiding for.
Starting today, yes.
We take the next question from the line of Kunal Shah from Edelweiss Service (sic) [ Edelweiss Securities ].
So this is Prakhar. Three questions from my side...
[Operator Instructions]
Yes. So sir, 3 questions from my side. First is in terms of VNB margins that we're talking about, maintaining it toward 20%. What will be the key driver, especially given the fact that we are spending on these channels? Second is in terms of your protection mix that is being contributed by your own channel force as of now. What is the current proportion and how do you aim to take it forward? And third is in terms of when you're talking about diversification in your own channel network and you're talking about inorganic opportunities as of now, what exactly do we have in mind right now?
Okay. So on your first question, the VNB of 20%, actually, we had VNB of 20% as we finished last year. We're hoping that the structural margins will go up as we are ramping up the protection percentage. Now the real protection generator is the penetration through individual business in protection. When we finished last year, our protection mix for the full year was around 4.2%. We are hoping -- for the quarter, we are 7%. We are hoping that we will be somewhere in the range of about 5% to 6% or closer to 6%, which will be a 200-basis-point improvement in the penetration of protection. Generally, that gives a lift in the structural margin. So the margin, without these investments that we are incurring, would have gone up by closer to about 150, 200 basis points. But because these investments, those margins will be reduced by some bit of overrun. But we may still land up at the same margin level where we were last year. The second one is on protection, how much do we get from our own channels. So of the 7% margins that we have delivered, closer to about 5% comes from our own channels. So about 3%. Of the 5%, about 3% comes from digital channel, about 2% comes from the rest of channels like agency or direct channels, et cetera. And the balance, 2%, comes from the third-party distribution channels. So of the 7%, 5% comes from own channels and 2% comes from the third-party channels. In terms of diversification, of course, that's an agenda that we've been very aggressively driving. And some of these investments that we're making are because of our intent to diversify, especially make investment in our own channels. And we're hoping, like Mohit just highlighted, that as a result of all the investments that we're making, at the end of year 3, we will target to have our own channels grow somewhere in the range of about 35% to 40%. And hence, the other channels, Axis Bank included, should be in the range of about 60% to 65%, which is currently about 10 percentage points off. So I guess all the investment that we'll make, we'll make our overall channel dynamics more diversified. You would also have noticed that there is a significant effort which has been made over last 2 years to also diversify our product mix. You will notice that we were significantly about 2 years ago and our product mix used to be more than 60%. We have now balanced it. And you notice that in the quarter, our mix on products on par was 38%. And equally, the mix on ULIP has gone up to about 40%. And as we have repeated multiple times, this is a very well-thought through planned move, so that on product basis, we are diversified too, to make sure that the concentration risks are minimized. So to summarize, there are efforts underway to diversify both our products and our channels.
So sir, a couple of follow-ups, if I may. In terms of your credit protect policies, so that contribution is only 1%. What is our thought process on that are you open to explore that route because some of the peer companies are using that route aggressively in terms of growing that part of the book. So what is our thought process regarding the same? And if at all not -- we are not planning to grow it, why is that so? And second is in terms of [indiscernible] talking about your channel distribution. I was more alluding to the fact that therein he mentioned a line saying that we are open to inorganic opportunities, we are [indiscernible]. What exactly is that inorganic opportunities after this IDBI Federal is?
Okay. So on your question on group protection on credit protect, I think we will be tactically interested in ramping up the group protection bit. However, it's not a part of our large strategy because we believe that they may be some regulatory issues that would come out of it, with respect to the credit protect business. So our first priority is to ramp up the individual protection mix. And as we mentioned, in 3 years' time, we will see this number to go up to closer to about 10%, 10% or 11%. Because that, we believe, is sustainable. That, we believe, is a retail. That, we believe, really drives the behavior. And hence, we are more biased and more keen to work on the individual business and try to drive individual business. That's part number 1. On diversification, as we mentioned, and it is quite obvious from all the things that you read and heard from us, we are quite keen to look at opportunities in inorganic space. And that is defined by 2 different opportunities. One will be signing of as many Banca partners as possible, in addition to all the expenses and investments that we're making to drive our own channels. There are some market opportunities that we are currently working on and we're hoping that some of them will work. And the second one is to, really, look at acquiring a company. While there's nothing obvious which is there in the landscape just now, but we do want to keep this being pursued because we believe that over the next 2 to 3 years, there will be consolidation opportunities that we will try to leverage quite aggressively. You saw it from the move that we made with respect to IDBI. And we are very keen in a sense how the overall structure and discussion went. So as any opportunity comes our way, we will definitely come back and discuss with you. However, the percentages that I mentioned to you, the desired percentage is without considering any inorganic opportunity.
Okay. So just one clarification. You mentioned about regulatory issues in credit protect. If you could just elaborate some part of that.
So the credit protect business has -- is something where the market is still evolving. We have to see the regulatory posted with respect to which way it goes. We find that there may be arbitrage opportunities, for example, with respect to margins in the [ GPL ] side of the business or 1 part of group business versus this part of the business. And historically, we have found that wherever -- within group business, there are reasonable margins and a regulator comes and tries to adjust. So that's what I meant by regulatory. I don't have any reason to believe that there is something obvious which is going to happen. But as a group, as I mentioned to you, our belief in the individual business is more than on the credit protect business.
Our next question is from the line of Nidhesh Jain from Investec.
Sir, on credit protect, your share is at 1%. Is that correct?
Of the 9%, that's 1%. Yes, that's correct.
So 8% is group risk business.
Yes.
And sir, on the cost overrun, if I look at the OpEx growth this year for Q1, it seems like the OpEx growth will be low single digit. So where exactly this cost overrun is reflected in the statutory P&L?
Generally, it is very hard actually to link the statutory P&L to the valuation P&L in our overruns because it is a combination of multiple things, including the product mix. I think the biggest driver is product mix. And you'll notice that there, our product mix has altered quite significantly versus the first quarter of last year. We had 51% PAR, now it's gone down 38%. We had 28% ULIP, now it's gone up to 41%. So when these things happen, actually overruns gets altered. And hence, the overrun actually is happening because of the higher expenses that we're incurring in building our own channels as well as the change in product mix.
And then lastly, on this protection. So we are noticing that all the companies are reporting very strong growth in protection. And numbers like 15%, 16% share of production was never talked about 2 years back. So is it structurally something happening in the ground level? That the customers are more willing to take protection or it is because of companies are driving that growth?
This, I think, the real movement I see is on individual. So on individual, for example, we have reached 7%. About 3 to 4 years ago, this number used to be 1%. So we are making conscious efforts to drive the individual business. And so is everybody else. It is a result of new channels developing, digital as well as awareness which is being created. And suffice it to say, that the overall margin in this particular category overall is higher. So I expect this to continue to ramp up. However, I think the companies have started to report protection business in a particular manner only over the last 14, 15 months or last couple of years. For example, the GPL business is truly a protection business. However, counting GPL versus individual and credit protect is like comparing apples to oranges. So some of this has to be seen at a far more detailed level. And I explained to you what is the delta between GPL business and credit protect business. So GPL business has historically been for us about 6%, 7%. So if we were to, for example, represent we present this number 3 years ago or 2 years ago, we were close to about 10%, 11%. Now we have moved to 16%. But what we are really tracking at a company level is what is the data that we're getting on individual business and if possible our credit protect business? And our desire is to drive those 2 more.
And lastly, on the surrender view also noticed that the surrenders, especially on the ULIP product, has been coming down quite steadily over last few years. So structurally, is the longevity of a ULIP product is improving or is it just a one-off because of the current market scenario?
You say that only for us or for the industry?
Sir, that observation is correct for you as well and for some of the other companies who have reported as of now. I don't have the data for industry. But the 4 or 5 companies who have reported as of now, this observation is...
Historically, we have always been low. I mean, if you look at our numbers, which is there in Page #12 we were 21% in FY '17 we are 20% in FY '18. We appear like 24% in quarter 1. Now though we have given comparison, but on a run-rate basis, we are pretty flat. So I don't have data to really say that it's been coming down very significantly. More or less, it is stabilizing. But is not as if it's gone away.
Our next question is from the line of Adarsh P. from Nomura.
Sir, a question on your persistency, 37 months seem a pretty sharp improvement. If you can just elaborate on that.
Yes. I mean, a 3-percentage-point improvement, this is -- this generally happens because of moving along. So you see, we were -- about 3 years ago, we were around 80% and now we have moved to 83%. If we were to perhaps go back, we'll be more like 78%, 79%. So as the percentage of [indiscernible] improve, they kind of fluctuate and go forward. So I don't have a big reason or a specific reason to say. The collection efforts are currently much stronger, and we are seeing reasonable enhancement. If you see all across, at least in the 13th month, the 37th month, the 49th month, you will see an improvement anywhere between 100 basis points to 300 basis points.
Perfect. And the second question relates to product committee recommendations that came out in December last year. One of your peers quantified the effect on the margins implemented as and where in basis today. So anything that you can talk about as to the certain recommendations made and what would be the impact, if any of those get implemented.
If you could just elaborate a little bit more, Adarsh, it will be good for me. I'm -- unfortunately, I don't...
No, I'm talking about capping surrenders in the traditional business. So I know that you can work around different combinations of what the surrender rates could be and then that can be 2 different outcomes on margins. But if, say, in the next 6 months to 12 months there are caps on surrenders, then how does that -- obviously, your product mix will move a little favorably towards ULIP, at least from the regulatory standpoint. So just wanted your sense on how you look at your -- either your margin guidance in the context of any regulatory changes. That's right.
Yes, I understand your question now. Thanks, Adarsh, for explaining. It's very hard actually to say because surrender scale is -- has to be trued up, and we don't know what it will be. The recommendation has -- it's quite open in terms of how it could be constructed. Suffice it to say, however, that the cash value that we provide already and the tail that we follow is, for us, is quite superior and higher than what the current regulatory requirement is on PAR. So we are already on the higher side than what basic minimum that the regulator requires. And hence, depending on what it comes, we will see which way it goes. However, we must like to keep in mind that these changes are -- while the broad committee has given this recommendation, we must know that participating policy is currently from close to about 60% of the total industry sales as of today including LIC. And hence, any recommendation that is either proposed by the committee or reviewed by the IRD will be reviewed with enough caution and enough practical approach. So we will see when it comes. Currently, very hard for me to give you guidance in terms of what will be the margin this time because I don't know what scale will get pursued.
And my last question, any progress on discussions with taxes in terms of elongating your distribution [ tie-ups ]? Obviously, it's been 3 months since the last call, but if you can just talk about any moment or status quo?
Well, the truth is we're all waiting as they are for the new CEO to join. However, we've had some informal discussions with them. Whilst nobody can confirm, but at this point in time, all I can say is that both sides are kind of well-disposed in terms of how this relationship has panned out over the last so many years. And if we really look at it from their point of view, this is probably really a solid annuity kind of a fee business which we've been getting for all these years. And so it's beneficial for them. And from our perspective also, it's been a sustained a source of growth and revenues for us. So this relationship has stood about 8 years or so, and frankly, I would be surprised if this arrangement is kind of shaken up for -- just for the sake of actually trying to do something which is somewhat different. As far as their manufacturing aspirations and all of that is concerned, I think whilst there's no formal communication from Axis' side, but indications seem to suggest that, that's something which I don't think they're going to pursue at this point in time. So I know that has taken a long-winded answer, but this is where we really are. So we'll have just to wait until the incumbent comes onboard to commence our dialogue all over again.
Our next question is from the line of Neeraj Toshniwal from Emkay Global.
Sir, sole protection as a segment is increasing for the industry as a whole. And so there was a bump-up in your protection first quarter of last year as well at 13% and now it's 16%. So any relation, I mean, to typically, the first quarter having a higher share protection mix?
Well, we did notice a bump-up in the first quarter of last year. And we reached about 6%. But by the time we've finished the year, we came at 4.2%. Which means, for the rest of the quarter, we didn't do quite well. And it so happens that as the year passes by, the sales teams are quite motivated to do more and more sales. And hence, the focus on balancing the product mix and trying to drive protection per se actually goes down amongst distributors. So we have made some changes this year, which means we have now adjusted the overall target in a manner that it is more front-loaded. And the good part is that some of these numbers, of 7%, et cetera, if I look at the number in July, for example, 1 month after the quarter has ended, are sustaining. So they're not falling back to 4%. So I have reasons to believe that the structural changes that we have made will definitely get us reasonably higher than where we finished the full of last year. And like I told you, I'm expecting, at this point in time, to have anywhere between 150 basis point, 200 basis point increase in the protection mix on individual basis of full year versus last year, which will give the kicker in the margin for us to absorb additional expenses that we're incurring towards driving their own channels, our own channels.
Okay, and any NVB analysis you have done in terms of the kind of return we get on the investments you're getting? Because looking at the data, we are not able to actually make of how much the overruns is impacting your numbers because it is not coming into the P&L.
I think we'll just wait to see how it pans out because we've just began the journey. So I think it will be irrelevant question to review past 9 months and 12 months. We just began so we haven't made very significant investments.
But the impact on the overrun has been higher. In fact, if we have not done only just INR 10 crores, INR 15 crores, we have spended and the impact it has been on the overruns has been on the higher side. So I just wanted to have some color how we are seeing it panning it out? I mean, how to actually see the numbers post overrun for this year, because you are sticking to your target. So that is what I'm not able to actually sum it up. How actually it will -- because we will be spending some INR 120 crores in this year itself, and what will be the repeat costs in the future years and next year? Or are you keep expanding over the next few years?
I think, 2 or 3 points, actually. One is the overruns, as I mentioned to you in the previous question also, is simply not because of the investments that we are making. It is more out of the seasonality. And I think we are the only company that perhaps you meet in terms of exactly telling you what overruns we saw for the quarter. I noticed that some of the peers are not even talking about it. They simply talk about their full year expectations of margins. So I can definitely confidently tell you that we had this kind of overrun. But suffice it to say, that because the discrepancy between the expense and revenue on new sales for the first quarter, generally most of the companies have overruns. As I mentioned to you, we have only 15% of sales that has come for -- in the first quarter, which is true of the industry also. However, we end up incurring 21%, 22% of expenses because of the fixed nature of the business. Now as the quarters -- the further quarters come, sales actually ramps up because that's how the industry is trued up. And hence, the overruns actually go away. To answer your question, like I mentioned to you, on a structural basis, our margins, I'm expecting should come more in the range of 22%, 23%. And net overrun numbers should be closer to the margin that we declared last year. So that will impact all the additional investment that we'll make to our overrun numbers.
Okay. And any -- or so in terms of recurring, how much would that be in the next year?
So these are generally recurring. And the overall expenses actually will increase because we are adding capacity. But you must remember that when you add capacity, this generates new sales and new revenues. So there's generally a blip in terms of expenses going up. But they start to support themselves as the sales gets generated from those offices. Also, I've been highlighting since last time that the model that we are following for agency is a bit different from the typical agency where we'll go and start a large office, et cetera, and they will have a lot of fixed costs. A very significant part of -- in all this is variable in nature. Like Mohit just mentioned to you, that for us to start 145 offices, we are outlooking a CapEx only INR 58 crores, which means a large part of that is very small units. And this includes all the IT spend that we'll incur and all facilities and everything. So we're not going to significantly incur expenses or fixed costs to set up these offices. On an average, every office is going to cost close to about 30 lakhs. So we are looking at a model which is self-sustaining, which is more variable in nature. And as it generates more sales, the overruns will start to go there.
Okay. And this will be to your number of 350? I mean, that is in the beginning also. Number of offices, 145, will take you to a total of 350, right?
That's by the end of the year.
At the end of the year, okay. And sir, in terms of broader, our mix will be now stable. I mean, 41%, 40% of ULIP and PAR somewhere on, again, 40%. And this 20% coming from the savings and protection, non-PAR savings, non-[indiscernible]?
Yes. I think we will be on ULIP between 40% to 45%. And on PAR, we will be more like 35%. The balance will come from non-PAR.
Okay 35% and -- okay, okay. Okay that is from my side. I'll come back in the queue if needed.
Our next question comes from the line of Avinash Singh from SBICAP Securities.
Sir, first, this one needs follow-up, that you mentioned that individual protect and ticket size increase of 10% to 15% in this year. So my question around that is, is it that sum as you're going up, are also you have a sort of repriced your product? And related to that is, if I see your slide, it's saying that number of policy protection, that sale has now gone to 32% on the individual side. So I know that the overall people are increasing. But how -- I mean, how much of this sale, I mean 32% in terms of the number of policy can go up? Because I mean, eventually, because of the small ticket, that your overall premium sale is capped. So I mean, already, we are at 32% number of policies here. So how much further can it go up? And secondly, on -- I mean, it's a bit of a, I would say, a question with less information. If you look at your IDBI Federal acquisition attempt, at least from the public sources, the kind of valuation and whatever available multiple that has been talked. Now we have one or more companies also coming up for IPO. Do you think -- I mean, that valuation that was at least talked or being reported in media was justified for IDBI Federal?
So let me just give you the answer first on the first one. So it is true that 1 in 3 policies have now become from protection. And I will quite count this percentage as a percentage of total number of policies we are selling, predominantly because the level of penetration that we have around protection is very, very low in India. So even if it becomes 50% or 60%, I wouldn't quite be surprised. Those things are quite possible. And as you mentioned, the ticket size is small anyways. The second is you asked whether we have repriced any products. The answer to that is no, not yet. We may be looking at it as we go along, but no repricing has happened. It's happening out of our chosen strategy that we're following to go to higher income segments, which is what [indiscernible] making across all the channels. As a result of the, you have seen about 10% to 15% increase in the ticket sizes. On IDBI Federal, I guess, between Jatin and I, both of us will try to give you an answer. Maybe I will give you an answer from the company perspective, and then Jatin could also chip in with respect to how he sees it as a shareholder. But when we did the valuation of the company internally, for ourselves, with respect to the growth numbers and everything, our valuation which is closer to 3 multiples was possible. However, there were -- it was coming on several conditions. And those conditions were conditions with respect to product mix, conditions with respect to how long the relationship should last, et cetera. And as you know, the valuation on multiple is dependent on some of these factors. So what kind of product mix, what kind of margin and how long is the relationship, how productive those channels are. And those exactly are the terms that we started to negotiate. And when we found that some of those terms were not agreed to, we decided to come out of their discussion going forward because we believe that the valuation which we were discussing was not being supported by the assumptions which were behind it. But for a company which is in perpetuity, which is running long-term, et cetera, if you do a [ DCF ] method and the company is at good product mix, good margin, getting a valuation 2.5x, 3x is not a big deal actually. And Jatin, your point?
No. I think, Prashant, you covered it all. Mohit wants to say something.
Yes, all I want to say is that I would urge you guys to not believe the press that much. Because all they will put is a number without really putting the terms, conditions and caveats and all of that. I mean, one of the most critical items in our discussions with IDBI Federal was about the fact that this tenor should actually be in individually, right? But that doesn't get captured anyway. Number two, what happened in the event of a change of control, right? What happens when you say that you want exclusivity and you're not getting it? So when you look at all of these things and you start putting your caveats and then -- then to come with a multiple of 3 is fairly justifiable, I would say. But you just look at the number in isolation which is there in the media, I don't think you should just rely on that.
And then Prashant said it wasn't DCF what was the offered. Now as you sort of take -- step by step, take away the -- what's an offer, then automatically, the valuation of 2.5, 3x has no meaning, because we look at it from a DCF standpoint and not 2.5, 3 multiple.
Our next question is from the line of [ Ahmet Dhizani ] from Zenith Capital.
Just wanted a follow-up on -- so we said INR 170 crores will be the additional cost on improving the distribution channels. And assuming that we do new premiums of INR 4,000 crores, it is about 4.3%. So INR 170 crores divided by INR 4,000 crores. So is it fair to say that in FY '19, our cost overrun will be INR 170 crores divided by INR 4,000 crores which is 4.3%?
It is not that straight, Ahmet. Maybe it is a question that you should discuss individually with me. But the way it works is you have to look at how the accounting of these expenses happens, what of that comes to the shareholder because how do we compute is something that has to be seen. So it is not that straightforward. My sense will be it will be close to about 2%, 2.5%.
Okay. 2% to 2.5%, hitting the shareholders.
Yes. And just to clarify one more time, this INR 170 crores number is a combination of 2 things. About close to INR 120 crores towards building our own office, et cetera. And the balance of INR 50 crores is towards driving protection, higher marketing costs and investment in channels which could give us higher growth. So it is located in these 2 parts.
Right, correct. So cost overrun total is about 2.5% of the [ APE ] in your estimate.
Sitting today, that's the ballpark number that I talked about. But as we come closer and we finish the year we'll continue to come back and we'll continue to update you as to those numbers.
Ladies and gentlemen. That was the last question. I now hand the conference back to the management for closing comments. Over to you, sir.
Thank you for much for sparing time off to be on the call. And we'll be doing this consistently over the next quarter or so. So thank you for sparing time. Goodbye.
Thank you, members of the management. Ladies and gentlemen, on behalf of Max Financial Services Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.