Dhwanil's Portfolio

(Mridul) #121

@desaidhwanil bhai - Thanks for the informative write-up. Few questions regarding valuation and overall business of max India.

Valuation -
I understand that as per the stake sale to it JV partners - Bupa @ 1.8 times one yr fwd GWP, and to Life Healthcare @ 30 times EV/EBIDTA, valuation at the moment seems fair ~ 4250 cr, which is the current market cap (4157 Cr).

EV/EBIDTA = EV= 30 * 300 ~ 9000 cr
9000 - debt (1091 cr) = 7900 cr
46% stake is valued at 3634 cr

1 year forward GWP = 670 cr
@ * 1.8 times
= 1206 cr
51% stake is valued at 612 cr

So 3634 + 612 ~ 4250 cr

But we need to take into account the peer valuation? Say, Apollo has close to 9100 beds and is currently valued at 1.5 times per bed (excluding pharmacy business). It being market leader is commanding a premium. So, market won’t be giving more than 1.25 cr per bed for Max Healthcare’s bed. Now consider this —

a. Max Healthcare -

i. As per Bed count - 2500 beds. Recently, deals worth 3.2 cr per bed have taken place (Medanta) based on the type of hospital and specialty segments (secondary, tertiary care). Setting up a new facility costs somewhere around 75 lac per bed (without land costs). Lets assume 1.25 cr per bed as being present in NCR region, Max Healthcare is conservatively worth 3125 cr. Max India’s stake in Healthcare division is 46%. So, 1437 cr as of today.

ii. As per EV/EBIDTA -

Mkt cap (4100 cr) Debt (1091 cr) Est. FY17 EBIDTA (300 cr)
I am assuming 20 times ev/ebidta from commentary of recent acquisitions. EV comes out to be 6000 cr

EV = mkt cap + debt - cash
mkt cap = 6000-1091+0 ~ 4900 cr
46% Max India’s stake is worth 4900 *46/100 = 2254 cr.

Profitability will gradually improve, so does return ratios as you have already pointed. Utilization driven efficiency improvement seems to be limited as hospitals are already operating at 70% utilization. And this has been the case from last 4-5 years, so i am assuming this is sort of optimum level they can operate at.

Another thing about valuation here is brownfield expansion capability. Max Healthcare can expand to double its current size (all brownfield), which is also a consideration in valuation calculations. Its a very big positive here, as land costs are huge and greenfield expansions are very costly.

b. Max Insurance -
Assuming 1.5 times GWP ~ 540 * 1.5 = 810 cr
Max India’s stake being 51% (413 cr).

c. Antara (100%) - Can’t value this business as no clarity on the revenue model. In last concall they said it is 60 year lease model.

Taking valuation from EV/EBIDTA model for Hospital business = 2254 + 413 + 0 ~ 2667 cr
Taking valuation from per bed model for Hospital business = 1437 + 413 + 0 ~ 1850 cr
Current market cap = 4157 cr

So there is a big valuation gap between the “actual current valuation” and what its JVs have paid. I would say this is almost as if we at current market cap are discounting next 3-4 years of earnings. Isn’t this pretty costly?

Break even
Healthcare business has already break even this year and insurance business is supposed to break even in 2 years from now as per the latest mgmt commentary.

My take
Market tends to give very high valuation to business which have a very long runway for growth at high rates, great ethical management with an ability to exploit the opportunity size. Here, both healthcare and health insurance businesses have a very long runway for growth for obvious reasons. Health insurance industry in India is highly under-penetrated and is growing at 25% CAGR. It can maintain this run rate due to many reasons - rising healthcare costs, increasing population, increasing middle class, increasing awareness and affluence, rise in diseases, tax saving incentives. Same goes with private hospital business in India, which is expected to grow at 19% CAGR till 2020 and beyond. The segment has tremendous growing opportunities as good affordable healthcare is going to be in vogue due to demand coming from increasing middle class.

Personally, i like their insurance business much more due to its scalability. Once they achieve break even in 2019, we are going to see very good bottomline growth in this business. Key here with health insurance business is risk management and low claim ratio. GWP growth is important but more important is a stable/declining claims ratio. max insurance is very small in size at the moment and has best claims ratio in the industry. As it expands, this would be the key monitorable going forward.

(Dhwanil Desai) #122


I have exited HMVL. Please refer to my earlier post for the rationale.

@Mridul - I am not sure about the underlying assumption for taking 1.25 Cr per bed valuation as from whatever that I have read - all major hospital deals in Delhi/NCR are above 2 Cr. In fact, if you look at Life healthcare deal, where the acquired 20% stake, it would translate into valuation of around 2.5 Cr/per bed in 2014. Another important point that you have alluded to is the product mix that various hospital offers is a significant driver of the valuations that they command. Max derives almost 53% (q3 FY17 presentation) of their revenue from tertiary care (Complexity is much higher than secondary care), so I believe, they will at least command as much valuations as Fortis/Medanta.

On the utilization, newly acquired hospitals have much lower utilization ratio- hence I see room for improvement there (they have done that already over last year- refer to q3 FY 17 presentation)

(Mridul) #123

@desaidhwanil bhai - i mentioned “Recently, deals worth 3.2 cr per bed have taken place (Medanta) based on the type of hospital and specialty segments (secondary, tertiary care).” Max definitely has 53% of its revenue coming from tertiary care, which is definitely a reason for higher valuation. Though, i am not sure… by how much. Probably will have to check the deals that have gone through and there tertiary care revenue component. Also, one important consideration, as i mentioned above is the brownfield expansion potential. Here in case of Max, bed size can be doubled in the existing premises of Max Hospitals.

Though, what i don’t understand is - If Apollo being market leader is valued at 1.5 cr per bed, will market value Max Healthcare more than the leader? Probably the thing is how market values it (based on p/e, ev/ebidta), and how the acquirer values it. Acquisition costs are usually very high as we have seen with so many hospital deals, whereas the valuation market assigns to hospitals is much lower than that. Take for instance -

Kovai is currently being valued at 1.25 cr per bed.
Indraprastha is trading at 0.75 cr per bed
Apollo - Around 1.5 cr per bed

Why are acquisition cost higher than what the market is assigning to these players?

Max India - Demerger, Will sum of parts be greater than single entity
(Hitesh Patel) #125


Per bed cost will also vary with the kind of geography we are talking about. The cost of real estate, labor etc will be much higher in places like Delhi/NCR as compared to places like Kovai.

Plus the other factor referred to earlier which is the valuation of a plain vanilla generic hospital would be much lower as compared to hospital where a lot of superspeciality stuff being done.

I have invested in Max India on the two pillars of businesses which are hospital and health insurance. Basic question I ask is will these businesses be relevant 5-10-15 years from now. The answer is a resounding yes.

And do I trust the management to take the company forward to exploit the opportunities that are there or will come about in future in the most profitable way? Again going by past track record the answer comes out as yes.

Valuationwise usually beauty lies in the eyes of the beholder. But if both the businesses keep growing at 20-25% CAGR I see the company growing quite well.

Besides these the lab business with its thrust on B to B and B to C could spring a positive surprise.

And the joker in the pack could be the Antara Living project. I see a lot of such projects coming out in the future looking at the social equations prevalent current in our society. I see a lot of senior citizens living alone with plenty of money but riddled with day to day problems of cooks/washing lady/ and such other staff not being regular in their duties. They also need proper healthcare. The best and most obvious solution for them is to go to live in a high class outfit like Antara where all the worries of day to day life are taken care of and people have an enjoyable old age.

(Mridul) #126

Hitesh bhai, agree with most of your points.

That both verticals growing at 20-25% CAGR for next so many years makes this a resounding investment. Opportunity size is huge and the management is good. So both size and execution is sort of beyond question.

I am doing this exercise more so to understand the valuation aspect of this business. If you can put more light on this question–

“Probably the thing is how market values it (based on p/e, ev/ebidta), and how the acquirer values it. Acquisition costs are usually very high as we have seen with so many hospital deals, whereas the valuation market assigns to hospitals is much lower than that (evident from its market cap).” Should this mean, market is undervaluing its potential at the current price?

(Amit Aggarwal) #127

@hitesh2710 @desaidhwanil
A good read on Antara and Max India

(roy) #128

@desaidhwanil Hi Dhwanil, are you still holding Shemaroo? And how do you interpret the latest result? Revenue has suffered slightly.

(Dhwanil Desai) #129


Yes, I continue to hold Shemaroo.

I feel as investors we must recognize that all businesses have lot of moving parts and are also influenced through external environments. Hence,our expectation of having smooth ride through out investing period for each quarter should be moderated :slight_smile:

On the Q4 results, de-growth in traditional media business, is a function of lesser ad spends- hence lesser content budgets by broadcasters- hence lesser deals - translating into lower revenue for Shemaroo. In fact, it was hinted by the management in q3 concall as well. I also feel that being a deal based business, typically traditional media business is lumpy in nature- hence we should evaluate the business on yearly basis rather than quarterly basis.

In short, I feel the underlying investment thesis/hypothesis remains intact for Shemaroo.

(niraj.dugar) #130

I have a question here…will the health insurance business always be valued at GWP basis or will the valuation metrics change once the Company starts making profits due to operating leverage?

The business of Max financials will also be merged with Max India…will that add any value? And do we have any idea where the non-compete of 800 crores accrue?


(roy) #132

Yes, agree. The reduction has been in the traditional media business. I have a small position and may look to increase if the slide continues :slight_smile:

(Vivek) #133

Ma india is buying 3.75% of MHC @ Rs 105 per share for 212 crores and has issued warrants @ Rs 155


(kanvgarg123) #134

Isn’t that odd ? Why would IFC sell at 105 if promoters have issued warrants at 155 ?

(niraj.dugar) #135

Warrants have been issued at a higher price from Max India Limited which has other businesses as well whereas IFC is selling stake in Max Healthcare.

(Vivek) #136

Rs 105 per share is for stake in MHC not Max india

(kanvgarg123) #137

@niraj_dugar Thanks :slight_smile:

(sandeep kochar) #138

sir, when is Artemis Hospital going to list…

(Samir P H) #139


Can you please share your thoughts on MCX? The stock has been on a downside for a month now. Is there any concern you see with the fundamentals?

(Dhwanil Desai) #140


I wish I knew! :slight_smile: I think it takes at least couple of months to complete all modalities and get listed. However, no idea on firmer timeline


The volumes traded on exchanges have come down substantially post demonetization especially in bullion segment…so considering the negative operating leverage this kind of businesses have, the bottom line will be under even more pressure in shorter term

However, structurally, it remains a very strong story considering the way the regulatory environment is shaping up with widening product basket, introduction of options and institutional participation.

(sandeep kochar) #141

Sir all big Hedge players like Titan and other gold/oil companies are hedging at Dubai exchange rather than indian commodity market …it may be due to lower cost structure and easy regulation there…wht MCX/SEBI doing to attract these big hedgers…?? any idea sir

(Mridul) #142

A significant portion of the proceeds from this transaction will be utilised by Max India to acquire a 3.75% stake in its flagship business Max Healthcare (MHC) from International Finance Corporation IFC, which owns a 7.5% stake in it. The balance 3.75% stake held by IFC will be acquired by Max India’s joint venture partner, the Life Healthcare Group which is South Africa’s second largest hospital chain. The total consideration for the stake acquisition will be Rs 423 crore translating to Rs 105 per share of MHC.

Valuation confusion…

423 Cr is for 7.5% stake in MHC. So, as per simple math, 100% MHC is 5640 cr. Then how come it comes to 105 per MHC share? When the whole company (healthcare plus bupa and antara) is trading at 150 (4000 Cr)? What is that I am missing?