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