Max India

Though Max India’s insurance business is yet to mature, it is an attractive pick for the long term considering its earnings potential

THE fairly recession-proof insurance sector is not well represented in the Indian financial markets, but for a few listed companies. Among these, Max India seems to be a promising bet. The company has diverse business interests in insurance, healthcare, packaging and clinical research. Considering the growth clocked by its insurance business and its expected capital infusion, Max India is seen to be an attractive pick for the long term.

BUSINESS:

The Rs-3,250 crore group is diversified into insurance, healthcare, specialty packaging business and clinical research. Earlier, Max India group had a presence in telecom, pharmaceuticals and medical transcription businesses. At present, insurance business accounts for more than 80% of the company’s revenue, while each of specialty and hospitals business contributes 8%. The remaining revenue is contributed by the company’s clinical research business.

Max India is operating in the life insurance segment through its subsidiary, Max New York Life, which has New York Life as its foreign partner. The company is among the top three private insurance players in the northern and western India. It has a conservation ratio of 80% that represents a high policy renewal rate. Nearly 60% of its revenue is contributed through agency channels and the rest through alternate channels. The company has outperformed the industry since the beginning of the current fiscal. For instance, during the quarter ended December 2008, the company posted a growth of 9% in its business, while the industry registered a 13% drop.

With assets under management of Rs 4,800 crore, the insurance arm of the company is still under losses that rose on account of significant expansion undertaken by the company in the life insurance business. Max India expects to achieve a break-even by FY12.

The company, through its subsidiary Max Healthcare, operates a network of eight hospitals in the NCR region with an average of 714 beds. The average revenue per occupied-bed stands at around Rs 19,464 and its average occupancy rate stood 63%. While the business generates cash profits, a net profit breakeven is expected by FY11.

The company’s specialty packaging business is growing at an average EBITDA rate of 15% per annum and returns 18-20% on capital. The company is into a niche segment of manufacturing BOPP films and also provides packaging service to FMCG companies.

The company, in July 2008, made its foray into the health insurance sector through a joint venture with UK-based international health insurer Bupa group. The venture has potential synergies with its existing life insurance, healthcare and clinical research businesses.

GROWTH STRATEGY:

Max India is quite aggressive on its insurance business with an intention of turning it into a profitable one by FY12. However, the company has revised its plans due to the financial slowdown and lowered its growth targets. The company now intends to open 100 sales offices every year with the total number of offices exceeding 1,000 by FY12. Agency strength is also slated to grow from current 72,000 to 2,00,000 agents during that period. The company aims to maintain a 15-20% lead over the market’s performance.

In order to strengthen its distribution channels further, the company has entered into a tie-up with Barclays Finance, one of the leading NBFCs with 119 branches. The company has tie-ups with various domestic and international distributing companies.

Max India is also in the process of setting up five new hospitals, one in Dehradun and the rest in NCR. This will help double its bed capacity to 1,500 beds in the next 2-3 years. The company’s health insurance business is likely to gain traction in revenues soon. However, it will start contributing to the group’s income in another 4-5 years.

FINANCIALS:

Max India’s consolidated net sales have increased at a compound average growth rate (CAGR) of 55% to Rs 3,241.4 crore over the last five years. On a consolidated basis, the company has been reporting losses as it has warranted a significant investment in its insurance business.

The company’s performance has been affected during the quarter ended December 2008 as it posted a 32% drop in case rate per agent and a 23% drop in the average case size. Besides, the drop in crude oil prices has adversely impacted the earnings and revenues of the company’s packaging business in the short term due to downgrading of inventory costs. The company’s healthcare business has logged profits, albeit on a marginal y-oy increase in revenues. The life insurance business has been capitalised at Rs 1,782 crore, and the company intends to raise a Rs 1,000 crore through its proposed rights issue.

VALUATIONS:

The company is valued at nearly half of its investments or assets under management in line with its peers. While its insurance business is making losses, the company has the potential of being a profitable company. The company is currently in its growth phase – with most of its businesses still achieving the traction required for reporting profits. Investor can look at investing in this stock with a horizon of at least three years.

One-year beta: 0.56
Institutional holding: 39.4%*
Current dividend yield: 0