Max India to split its 3 business for unlocking the value…. Overall positive, upgrade to BUY from HOLD with target price of Rs 465 ::IndiaNivesh

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Max India has given a disclosure to stock exchanges on 12th January 2015 that it has
formed Investment & Finance committee for examining the options for corporate
restructuring. With respect to this, there is news that Max India might go for splitting
its 3 businesses and at later stage list each of them separately. As per the news,
Max India will separate its insurance ie Life and health insurance which will be held
under new holding company and in the same way they will form holding company
for healthcare business and speciality films business will continue to be under Max
India. After this restructuring they might look for listing each business separately
for value unlocking.
Our take and valuation
We believe this will be positive development for the company as Max India being
holding company is not getting that valuation at consolidated level. Market
capitalization as on 13th January 2015 for Max India was Rs 108 bn (as per BSE).
However as per recent transaction of Mitsui Sumitomo in April 2012, Max Life
insurance itself was valued ~Rs 105 bn, which is ~2.8x its Embedded value for FY13.
In July 2014, Life Healthcare has increased its stake in Max Healthcare by valuing
company at ~Rs 40 bn which again was at higher valuation of 35x FY14 EBITDA. If
we only consider these 2 businesses value then total valuation will be ~Rs 145 bn as
against current market cap of Rs ~108 bn of Consolidated Max India. Hence we
believe this will be positive move for Max India and its shareholders.
Max Life remains outperformer in private life insurance space despite challenging
business environment in terms of growth in first year premium, increasing market
share based on individual annualized premium equivalents and stable persistency
rate. Further healthcare business continues to show strong traction in terms of
margins and continuous increase in operational bed.
Max India has moved up by 28% in last 3 months on back of talks about increase in
FDI limit in insurance sector. We are upgrading Max India to BUY from hold with
revised target price of Rs 465 as we believe value unlocking is on cards and now we
value Max Life based on past deals in insurance sector of ~3x embedded value and
16x EV/EBITDA Max Healthcare business.