Bupa to increase stake in Max Bupa Health insurance… positive for Max Bupa over long term… :: IndiaNivesh, link

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Bupa to increase stake in Max Bupa Health insurance… positive
for Max Bupa over long term…
Bupa, a leading international healthcare group, is planning to increase its stake in
Max Bupa Health Insurance to 49% from 26% currently. This will be the first
investment by foreign player after the Insurance Law ordinance passed in December
2014. However this deal is subject to successful completion of the law making
process as well as all relevant regulatory and legal approvals.
Our Take and Valuation
Currently Bupa holds 26% in Max Bupa Health Insurance which is inline with foreign
Direct Investment (FDI) limit. Health Insurance business by nature is less capital
intensive as tenure for which insurance is written is less compared to life insurance.
Also Max Bupa contribution to total consolidated revenues of Max India is only
2.6% in FY14 and we have estimated its value in SOTP valuation at Rs 24 which is
6.5% of the total valuation, valuing it at 1x FY16E capital invested. Since Bupa has
option to increase the stake (as per the management) in Max Bupa Health at face
value of Rs 10, there will be only inflow to the extent of 23% of the paid up capital
of Max Bupa. As of Q2FY15, capital of the company was at Rs 7.3 bn and management
specified that inflow of ~Rs 1.8 bn to Max India is expected which is 23% of FY15E
capital which will be invested in Max Bupa for further growing the business. Hence
we believe it will be positive for Max Bupa over long term as this money will be
used for future growth of the company. In FY14 and Q2FY15, Gross written premium
of Max Bupa grew by 49% yoy and 22% yoy and we are expecting Gross Written
Premium growth of 19% over FY14-16E.
At CMP of Rs 393, Max India is trading at consolidated P/BV of 3.3x and 3.1x for
FY15E and FY16E respectively. We continue to like Max India as it continues to
outperform 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. However recent run up in stock price on back of
ordinance clearance leaves no scope for further upside.
We believe valuation for Max India has reached its fair valuation and currently we
have a hold rating on the stock with SOTP target price of Rs 367. However if we
assign a bull case scenario by giving valuation based on past deals in insurance
sector of ~3x embedded value, then the SOTP target price will be Rs 465, by valuing
Max Life at 3x FY16E Embedded value and 16x EV/EBITDA Max Healthcare business.
However we continue to consider our base case scenario assumption for valuing
the company and maintain the target price of Rs 367.

LINK
http://www.indianivesh.in/Admin/Upload/635563011692047500_NiveshDaily%20-%206%20January%202015.pdf