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Max India
Stock Update

Emerging Star

Life insurance boosts profitability

Company details Price target: Market cap: 52 week high/low: NSE volume: (No of shares) BSE code: NSE code: Sharekhan code: Free float: (No of shares) Rs295 Rs3,718 cr Rs254/158 4.3 lakh 500271 MAX MAX 15.2 cr

Buy; CMP: Rs160

Result highlights Max Indias Q4FY2010 consolidated operating revenues grew by a strong 21% year on year (yoy) to Rs1,586 crore. Meanwhile the profit before tax improved by a robust seven fold to Rs136 crore in the quarter vis--vis Rs17 crore in the year-ago quarter. The strong turn around at profit before tax (PBT) level was largely driven by the performance of the life insurance business. The life insurance business turned profitable during the year, recording a (PBIT) of Rs33 crore in FY2010 as compared to a loss of Rs402.5 crore in FY2009. The gross premium for FY2010 rose by 26% on a year-on-year (y-o-y) basis. The conservation ratio also improved during the year. Importantly, the company continues to consolidate its agent force as it focuses on optimal utilisation of the capital expenditure (capex) incurred in the recent aggressive branch expansion exercise. Max Healthcare (MHC) reported revenue of Rs534 crore, which is up by 26.2% yoy. The earnings before interest, tax, depreciation and amortisation (EBITDA) margin contracted by 240 basis points yoy to 4.4% primarily due to recent expansion (new services and employees) carried out by the company. Going forward, as the utilisation of these resources improves, the EBITDA margin is likely to be restored. During the quarter, IFC invested Rs150 crore in Max India for further investment in the healthcare business. The capital infusion will help MHC fund its expansion plans. Further, the subsidiary is looking to approach the capital markets for funds towards the end of 2010. A listing by way of an initial public offer (IPO) could lead to value unlocking for the subsidiary going ahead. For FY2010, Max Speciality Products (MSP) reported an 8.1% y-o-y decline in revenues to Rs340 crore led by fall in realisations despite a 4% y-o-y increase in volumes. The company is considering capacity addition to the tune of 20,000 tonne per annum (TPA; to be operational by the end of FY2011) to its existing capacity taking the total capacity to 49,000TPA. Max Bupa, Max Indias health insurance business, started operations in the quarter. Max Bupa received license from the Insurance regulatorInsurance Regulatory and Development Authority (IRDA) on February 2010 with the first product receiving approval in March 2010. The insurer has launched operations in six cities till date and expects to add three more cities in the next quarter. We remain convinced about the long-term growth prospects of the life insurance industry despite regulatory concerns plaguing insurance sales in the near term.
Results table Particulars Q4FY10 1586 244 1830 136 Q4FY09 1313 95 1408 17 % yoy 21 157 30 700 FY2010 5571 2158 7729 -44 FY2009 4508 384 4892 -333 Rs (cr) % yoy 23.6 462.0 58.0 -86.8

Shareholding pattern

Public & others 32%

Promoter 35%

Foreign 27%

MF & FI 6%

Price chart
250 230 210 190 170 150 Mar-10 Jun-09 Sep-09 Dec-09 Jun-10

Price performance (%) Absolute 1m 3m 6m 12m

-9.1 -16.5 -26.8 -14.8

Relative -5.9 -19.3 -27.1 -27.5 to Sensex

Operating revenue Investment and other income Total Revenue Profit/(Loss) before tax

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June 01, 2010

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Further, the improving profitability of the life insurance segment coupled with the distribution tie-up with Axis Bank provide much optimism relating to the future potential of Max New York Life (MNYL). The performance of the other subsidiaries of Max India too remained healthy during the year and the expansion plans, the funding for which has largely been obtained, would aid in boosting the companys bottom line in the future. We maintain our Buy rating on the stock with a price target of Rs295. Life insurance business Muted APE growth For the full fiscal 2010, the annual premium earnings (APE) of MNYL remained largely in line with that of FY2009 even as private players saw their APE grow by 11.8% yoy in FY2010. The lower-than-industry APE growth for MNYL was on account of its smaller distribution network vis-vis its peers as well as its increased focus on profitability. Life Insurance segment turns profitable As a result of a focus on profitability, the segment recorded a PBIT of Rs33 crore in FY2010 as compared to a loss of Rs402.5 crore in FY2009. Conservation ratio improves further MNYLs conservation ratio continues to be well above the industry average. For FY2010, the company reported a conservation ratio of 83%an improvement of 100 basis points on a y-o-y basis. The gross premium in FY2010 continued to be driven by a 50% y-o-y growth in renewal premium while the first year premium growth stood muted at 3% yoy. Agency force consolidation continues The agency force as in March 2010 stood at 72,813 agents down 14% yoyas MNYL continues to trim unproductive agents. With huge expansion in its branch network recently the company intends to focus on optimal utilisation of the increased branch network over the next few quarters. Tie-up with Axis Bank to boost growth In the quarter MNYL entered into a 10-year-long distribution agreement with Axis Bank. The agreement will allow MNYL to have access to Axis Bankss vast network of branches to distribute its products. For this, MNYL has proposed to transfer around 4% of its stake to Axis Bank. The equity issuance shall come into force post receipt of regulatory approvals. The absence of a bancasurance

partner has effected MNYLs growth as this led to a lower APE growth vis--vis its peers. The tie-up with Axis Bank will provide a strong boost to its sales going ahead.
Insurance business performance Particulars Gross premium Adj premium equivalent Conservation ratio (%) Average case size Agents (no) Case rate per agent per month Individual policies in force Sum insured in force FY2010 4861 1584 83 20,665 72813 0.66 2985207 123098 FY2009 3857 1595 82 19,172 84355 1.05 2578476 93593 Rs (cr) % yoy 26.0 -0.7 7.8 -13.7 -37.1 15.8 31.5

Healthcare business For FY2010 MHC reported a 26.2% y-o-y growth in revenues to Rs534 crore. The EBITDA margin however contracted by 240 basis points yoy to 4.4% and the EBITDA came down by 17.2% yoy to Rs24 crore. The EBIDTA was mainly hit by the recent expansion (new services and employees) carried out the company. Going forward, as the utilisation of these resources improves, the EBITDA margin is likely to be restored. During the quarter, IFC invested Rs150 crore in Max India for further investment in the healthcare business. MHIL has recently won a bid by the Punjab government and thereby awarded a 50-year concession to build and operate greenfield hospitals at Mohali and Bathinda. Max India has plans to induct 2,000 beds in the next two years and the total project cost is estimated around Rs220 crore. The capital infusion through IFC will help fund its expansion plans. The occupancy rates improved dramatically to 72.6% in FY2010 (as against 65.1% in FY2009) and the average revenue per bed per day increased by 5.1% yoy to Rs20,431. Max Healthcare is likely to approach the capital markets to raise funds and an IPO is expected towards the end of 2010. Media reports claim that the company plans to raise at least Rs450 crore from the offer. The majority of the funds will be used for buying small specialty hospitals in and around Delhi and the National Capital Region, while a part will be used to upgrade older secondary care hospitals in Pitampura and Patparganj, both in Delhi. The listing of Max Healthcare could lead to further value unlocking for the subsidiary.

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June 01, 2010

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Healthcare business performamce Particulars Revenue EBITDA EBITDA (%) Avg operational beds (no) Avg occupancy (%) Avg revenue / occupied bed day (Rs) FY2010 534 24 4.4 751 72.60 20,431 FY2009 423 29 6.8 712 65.10 19,433

Rs (cr) % yoy 26.2 -17.2 5.5 11.5 5.1

Health insurance: Max Bupa, the health insurance business of Max India, commenced operations during the quarter. Max Bupa received license from IRDA in February 2010 and its first product received approval in March 2010. The insurer has launched operations in six cities till date and expects to add three more cities in the next quarter. Outlook and valuation We remain convinced about the long-term growth prospects of the life insurance industry despite regulatory concerns plaguing insurance sales in the near term. Further, the improving profitability of the life insurance segment coupled with the distribution tie-up with Axis Bank provide much optimism relating to the future potential of MNYL. The performance of the other subsidiaries of Max India too remained healthy during the year and the expansion plans, the funding for which has largely been obtained, would aid in boosting the companys bottom line in the future. We maintain our Buy rating on the stock with a price target of Rs295.
SOTP valuation table

Specialty products business MSP reported a 8.1% y-o-y fall in revenues to Rs340 crore in FY2010. The revenues dropped on account of a decline in realisations in spite of a 4% y-o-y increase in the volumes. The EBITDA margin contracted by 120 basis points yoy to 12.7%. The current BOPP lines are running at 100% capacity utilisation. Max India plans to add another 20,000TPA capacity taking the total capacity to be operational by the end of FY2011 to 49,000TPA.
Speciality products performamce Particulars Revenue (Rs cr) EBITDA (Rs cr) EBITDA (%) PBT (Rs cr) Sales quantity - BOPP (tonne) FY2010 340 43 12.7 20 29,678 FY2009 370 51 13.9 25 28,503 Rs (cr) % yoy -8.1 -15.7 -20.0 4.1

Business Life insurance Healthcare Specialty products SOTP based price target

Method Appraisal Mcap/bed Price/Sales

Stake 73% 70% 100%

Rs/share 237 43 15 295

Other businesses Clinical research: The revenues from the clinical research business came in at Rs18 crore for FY2010. The order book remained at Rs32 crore increasing by 22 crore during the year.

The author doesnt hold any investment in any of the companies mentioned in the article.

Sharekhan

June 01, 2010

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