Equity infusion in Max India by Goldman Sachs will help the company expand its insurance and other businesses
To fund the expansion plans of its insurance and healthcare arms, Max India is issuing compulsorily convertible debentures and convertible warrants to Goldman Sachs and the promoters, respectively. The investment bank will put in Rs 538 crore to ultimately get a 9.4 per cent equity stake in Max India at Rs 216.75 a share.
This fund infusion is the second big-ticket investment in the company in the last six months. Earlier, International Finance Corporation, an arm of the World Bank had invested $30 million or Rs 150 crore for a 4.4 per cent stake in June 2009 at Rs 145 a share.
The promoters, too, will be subscribing to 20 lakh convertible warrants to the tune of Rs 173 crore for a 3 per cent stake. After the warrant conversion, they will have about 34 per cent while the other key investors Warburg Pincus, Goldman Sachs and IFC will have 14.2 per cent, 9.4 per cent and 3.9 per cent, respectively. Although the moves will lead to some dilution in equity, raising the funds is essential to secure long-term growth of fast-growing businesses.
| STEADY GROWTH | |||
| Financials (in Rs cr) | FY08 | FY09 | H1FY10 |
| Operating revenues | 3,244 | 4,508 | 2,543 |
| Investment/other income | 367 | 383 | 1,623 |
| Total | 3,611 | 4,891 | 4,166 |
| EBIDTA | 70.59 | -209.43 | 0.19 |
| Loss | -60 | -333 | -87 |
Funding plans
The investments (by Goldman Sachs and the promoters) will help the company raise Rs 711 crore. With an Rs 330 crore treasury corpus, the company will have about Rs 1,000 crore at its disposal. Max India has chalked out a Rs 930 crore funding plan till 2011-12 for its life insurance (Max New York Life; MNYL), health insurance (Max Bupa), healthcare (Max Healthcare and packaging (Max Speciality Films) businesses. About half of the funds (Rs 550 crore) will be invested in its life insurance business, which will primarily be used to increase its workforce and in meeting solvency requirements. Though Max India’s debt-equity ratio as of September 30, 2009, is only 0.3, the company was forced to go the equity route as IRDA rules do not allow it to use assets of MNYL to raise debt unless the insurance arm makes profits.
These investments are expected to take care of expenses till 2011-12 when MNYL is expected to post its maiden profit. Thus, a lot of future revenue and profit growth for the company depends on the MNYL business, which fetches over 85 per cent of the turnover.
| SUM OF THE PARTS | |
| FY10E | Rs/Share |
| Max New York Life | 236 |
| Max Healthcare | 47 |
| Max Speciality | 13 |
| Total | 296 |
| Source: Sharekhan | |
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Banking on insurance
With more than half of its policies issued coming from unit linked insurance plans (ULIPs), and these plans being largely linked to economic and the market environment, the last six months has seen a drop in new policies and premiums. For the first half of the current fiscal, for example, MNYL’s first year premiums (indicates new business generated) fell by 10 per cent to Rs 723 crore, while number of policies fell by nearly a fifth to 4.7 lakh.
With the economic recovery underway and markets looking up, the company expects the drop in policy and premium volumes to reverse and has targeted for a CAGR of 20 per cent over the next three years. While over 70-75 per cent of the new business is in the ULIP category, the company expects this to drop to 65-70 per cent due to the launch of its Universal Life, a protection-cum-wealth creation product.
At the operational level, the performance of the life insurance business (MNYL) has been above average with a new business achieved profit (NBAP; a profitability indicator) of 21 per cent, persistency ratio (policy continuation) of about 85 per cent and healthy solvency and productivity ratios.
Healthcare, others
The company plans to invest Rs 150 crore in its healthcare venture. It currently has 770 beds and plans to take this to 1,800 beds by 2010-11. The company currently has eight facilities and plans to add another seven in the next six years, of which four will be coming up in NCR. The company expects most of its existing facilities to turn Ebidta positive in two years, and a breakeven at the company (healthcare) level by 2010-11. Its Ebidta margins at 5.2 per cent, however, are not something to write home about (its bigger rival Fortis clocks 15 per cent).
The company is also planning to invest Rs 200 crore in its health insurance joint venture (Max Bupa) and will launch a product over the next two quarters. The company is also looking to invest Rs 30 crore in its packaging unit, which will help it nearly double capacity from the current 29,000 TPA by March 2011.
Investment rationale
While the company’s revenues have been growing at a rapid clip reaching Rs 4,506 crore in 2008-09 from less than a fourth of that in 2005-06, expenses (especially on account of expansion in the life insurance business) too has been climbing up. Expenses jumped five times from Rs 1,000 crore to over Rs 5,000 crore during this period. Given that life insurance is a long gestation business and takes about 7-8 years to break-even, the losses are not surprising. Going ahead, at the net level, the company is expected to report consolidated profits from the end of 2010-11.
On the valuations front, analysts peg the sum-of-parts number for the three businesses at Rs 295-300 (about 90 per cent of this is due to MNYL) which translates to a return of over 33 per cent from the current market price.