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Max India Ltd.
Insurance drives value;
Maintain Buy
„Raise our SOTP based PO to Rs222/sh
We raise our sum of the parts PO to Rs222/sh owing to stable growth in
insurance business post the new regulatory regime. Better than expected growth
in New business, expense management and growing AUM’s to drive the value of
insurance business.
Insurance business in the drivers seat, valued at Rs196/sh
Max NewYork life has managed to grow its new business premium even in tough
times (8% FY premium growth in FY2011 vs. decline of 19% for the private
industry). We value the insurance business at Rs196/sh (USD1.6bn, +33% on our
earlier value) using a 9x NBAP multiple on FY13E NBAP & 1xFY13E EV. Max is
better poised to grow on a stronger distribution network (AXIS bank tie-up).
Profitability: key focus for insurance business
Embedded value grew by 18% in FY11 to Rs32.2bn as against an 8% growth in
FYP growth. We forecast the EV to grow to Rs44.9bn by FY13E. Though the total
premium income grew by 20% yoy for FY2011, the company reported an AUM of
Rs138bn (yoy growth of 37%) for FY2011. The company’s conservation ratio of
78% in 1QFY12 also stands in the top quartile of the industry.
Other businesses valued at Rs26/share (US$154mn)
With aggressive expansion plans to increase bed capacity to 1800+ by 2012,
improving occupancy rate and 23%+ revenue growth, we expect healthcare
business EBITDA margin to scale up to 8% by FY13E. We value the hospital
business stake at US$78mn (Rs13/sh) based on 10x FY13E EBITDA multiple.
We value other businesses (Speciality chemicals and Clinical services) at
Rs13/sh (US$77mn) based on sector average EBITDA multiples.
Max Healthcare - valuation of Rs13/share
Aggressive capacity expansion in FY12
As of June’11 Max had an average operational bed capacity of 923 (up 1% over
previous year) patient beds across its network of hospitals and the company
expects bed capacity to increase to over 1800 beds by FY12-end. This would be
driven by commissioning new hospitals in Mohali, Bhatinda, Dehradun and
extension of Shalimar Bagh (NCR). Max’ overall healthcare revenues stood at
Rs6.9bn for FY11 with average occupancy rate at 68%.
Taking into account potential delays in commissioning of the various new
hospitals, we use a conservative sales estimate of Rs8.6bn (US$191mn) for
FY12E and Rs10.4bn (US$232mn) in FY13E. While EBITDA margins grew
320bps in FY11 to 7.6%, we expect margin expansion to be constrained due to
new bed capacities. However, we expect pick-up from 2HFY12 onwards to yield
EBITDA margins of 7.5% in FY13E (vs 6.5% in FY12E).
Pegging a value of Rs13/sh
Our revised valuation of Max’s hospital business is US$78mn (Rs13/share),
based on 10x FY13E EBITDA multiple, at 15% discount to Apollo Hospitals, to
factor smaller scale and lower profitability. Our valuation factors increased stake
of max in the Healthcare venture to 91.84% (effective from Dec-11).
Specialty plastics & clinical services valued at Rs13/share
Max’s specialty plastics business grew 31% YoY in FY11 (Rs4.4bn) and
generated ~12% EBITDA margin and 8% PBT margin respectively. Max India
ranks among the top five players in the specialty plastics business in India with a
production capacity of 52,000 tons/annum (22,000 tpa added in FY12). We
expect revenues in this business to grow strongly at 28% CAGR over the next 2
years on near doubling of capacity and sustain 10-12% EBITDA margin levels.
We value this business at Rs12/share based at 5x EBITDA multiple on FY13E.
We value Max’s clinical research business at Rs3/sh based on 10x EBITDA
multiple (in line with the global peer set average). Having grown revenues by 33%
in FY11 (Rs240mn), we expect this business to scale up to over Rs390mn by
FY13E given current order book of Rs310mn and business development pipeline
of over Rs330mn. This business currently has a 77 strong client base and a
database of 1400 investigators.
Price objective basis & risk
Max India (XMXIF)
Our sum of part based PO is Rs222. We peg the value of the insurance biz at
Rs196/share,owing to stable growth in insurance business post the new
regulatory regime. Better than expected growth in New business, expense
management and growing AUMs to drive the value of insurance business. We
value the insurance business at Rs196/sh (USD1.6bn), we use a 9x NBAP
multiple on FY13E NBAP & 1xFY13E EV. We value other businesses
(Healthcare, Speciality chemicals and Clinical services) at Rs26/sh based on
sector average EBITDA multiples. The risk to our PO would largely be from lack
of growth in the insurance business.
