I have been reading up about Max India and following are some notes ->
The company has three major businesses namely Max Healthcare (46% stake), Max Bupa Health Insurance (51% stake), Antara Senior Living (100% stake).
MAX HEALTHCARE (MHC)
This business was started in year 2000 and it is an equal JV partnership between Max India and Life Healthcare, South Africa.
The company currently operates 14 hospitals with 11 hospitals in NCR region and a hospital each in Mohali, Bhatinda & Dehradun. The Mohali & Bhatinda hospitals are under PPP arrangement with Punjab govt who has also provided 50 year lease for hospitals. 11 hospitals are NABH accredited and 1 hospital is JCI accredited. (Apollo has 17 NABH accredited hospitals and 8 JCI accredited hospitals).
Number of Beds
The company has 2330 operational beds (total beds at 2500) and It plans to add 900 beds over next 4 years and double the capacity to 5000 beds around FY23-24. The company expanded by acquiring 2 hospitals in NCR area in FY16. The details of acquisition are as follows ->
- Acquired 51% stake for 325Cr Rs. in Max Smart Super Specialty hospital (Previously Saket City Hospital). At the time of acquisition, the hospital had 300 beds (215 operational + 85 WIP). This brings the per bed valuation to 325/150 = 2.6 Cr per bed. The numbers of beds can be expanded to to 1200 over a period of time. The company has created a funding facility of 484 Cr through NCDs to acquire additional 49% stake Max Saket. This indicates even higher per bed valuation.
- Acquired 78% stake in Max Vaishali (Previously Pushpanjali Crosslay Hospital) for 247Cr. At the time of acquisition, the hospital had 260 beds, bringing per bed valuation to 247/(260*0.78) = 1.2 Cr per bed. The rest of the stake can be bought by Max at CMP after 4 years with the minimum price of 35 per share.
The company has planned a capital outlay of 650Cr to acquire stake in Max Saket & Max Vaishali.
The bed addition plan is provided by the company in latest investor presentation ->
The revenue and EBITDA figures for last 5 years are as follows ->
The company achieved total ~100Cr savings in FY16 & FY17 in MHC. The company plans to achieve 70Cr in cost savings in FY18 (18Cr achieved in Q1FY18). They claim to have visibility for this 70Cr and have set sights on next 50Cr.
Following slide in investor presentation captures the competitive landscape ->
The things worth noticing are the lowest ALOS (Average Length of Stay) & highest ARPOB (Average Revenue Per Operational Bed). The ARPOB is almost 50% more than Apollo. This is expected as Max is purely into Tertiary and Quaternary care whereas Apollo does primary, secondary & tertiary care. EBITDA per Operational Bed is at 20L.
The MHC has started following new businesses - Max@Home, Max Labs and Oncology Day Care.
One of the things that senior VP members have pointed out is superior debt structure of Max India due to management skills. Most of the debt repayments start with a delay of 12+ months and very few managements can get these kind of deals.
- Management has a very good track record of wealth creation and superior capital structure. Analjit Singh, Founder & Chairman, increased his stake in Max India at per share price of 155 Rs.
- This story is also an excellent hedge against the inflation - both in healthcare costs and property prices in NCR region. I think 3-4 years from now, per bed cost would be easily 3Cr+ per bed in NCR region & healthcare costs would continue to grow.
A lot of their future bed additions are brownfield expansions. Brownfield expansions turn profitable a lot faster than greenfield expansions. If management does get to 5000 beds over next 7-8 years, it would be a steady wealth creator.
- Most of their hospitals are concentrated in NCR region which is a economic, commercial hub in northern India and I think demand + customers willing to pay for good healthcare would continue to grow.
I think regulations and political activism would continue to be the continuous issue for hospitals business (and not a one time issue). We got a taste of that in stent price & knee cap price capping. Healthcare costs is a campaign issue in US, UK, Australia etc. and as India middle class grows in size, it would take more & more prominent space in politics.
- Equipment & Doctors
A lot of doctors work with several hospitals and many have their private practice. These doctors are willing to surgeries/treatment at lower costs in their private hospitals or trust operated hospitals etc. For surgeries that do not require special equipment or care, there will always be competitive pressure. I also have a mixed view on constant upgrading to new equipment etc. from cost point of view.
- Operational Efficiency
For business making loss, top 10 executives of Max take home 1Cr+ in salary. Also there is still some way to go before they achieve good operational efficiency and turn PAT positive.
Max Bupa is a 51:49 JV between max India & Bupa Finance, UK. It is standalone health insurance (SAHI) company in India.
The company has tie-up with 3600 hospitals across 350 cities. The company serves 20L total customers out of which 10L are urban customers. The health insurance industry has size of 25,000 Cr based on premium written and company AR claims it will grow to 50,000 Cr by 2020. There seems to strong tailwinds in the Health insurance industry with growth of 15% for many years.
The company has four distribution channels - Agency (17,000 agents), Bancassurance, Direct Sales (130 tele-callers) and B2B.
The company partnered with Bank of Baroda in FY17 which has 5400 branches & customer footprint of 6Cr customers. The company also has existing partnerships with Federal Bank, Standard Chartered, RBL Bank, Deutsche Bank, Muthoot Finance & Bajaj FInserv. The company has also partnered with South Indian Bank which gives access to 850 branches.
There are total 25+ general insurance companies and it is a very competitive sector.
GDPI, Loss Ratio & Combined Ratio
Star Health is biggest player in terms of GDPI. Max is a small player in health insurance sector and should have ample space to grow. Loss ratio of Max India remains at very attractive 50-60%. If commission + operational expenses can be efficiently managed, there can be underwriting profit. HDFC Ergo has best combined ratio and Max has brought its combined ratio down from 130% to 108%.
Since understanding insurance business is WIP, I will use Max Bupa & ICICI Lombard numbers as side by side. Please note that - ICICI Lombard is not strictly comparable to Max Bupa because it does insurance for Motor TP, Motor OD, Marine, Fire etc. as well.
Despite the loss ratio of 52%, company is making underwriting loss. This is mainly due to operating expenses being at 47%. The good thing is, operating expenses are more or less steady at 220-250Cr from FY14-17.
- The commission has been steady at 11% of GWP for last 5 years. As GWP grows, it would be good to track this number to see if growth comes via agents channel (expensive) or other (bancassurance/direct) channels.
- The hockey stick effect that is being talked about would be dependent upon - maintaining or improving loss ratio, maintaining or improving commission and improving operating expense ratio. i.e. bringing combined ratio below 100%. This way PAT will grow from two sources - investment income & underwriting profit.
- Investment Float has grown from 260 Cr to 628Cr over last 5 years and it is mainly funded through increasing equity of promoters 504Cr to 926Cr.
- All general insurance companies have to maintain unexpired risk reserve which is 50% of GWP for last 12 months.
- The investment record is nothing to talk about and it is same across all of general insurance companies.
- I feel standalone health insurance is a better play than diversified general insurer. Motor Third Party Liability is a huge drag on overall numbers of ICICI Lombard etc. due to mandatory regulations.
- Health insurance segment should have huge tailwinds if one compares health industry structure of India vs. other countries. 70% of healthcare expenses happen in India as out of pocket & healthcare costs are ever rising.
- Another thing I have personally experienced is, health insurers do not tend to approve whole amount claimed. In my family’s case, amount refunded was between 60-70% by ICICI Lombard. Also actual expenses incurred might be less than sum insured (e.g. Rs. 50,000 hospitalization cost against the sum insured of Rs. 1L). So there is some way to manage loss ratio.
- No diversification if health insurance industry faces headwinds like regulatory issues etc.
- Indian insurance market is very competitive and it might be difficult to make money or underwriting quality can go out of window at the expense of growth.
ANTARA SENIOR LIVING
I have nothing to add about this business other than I think that this is a capital mis-allocation. Senior living is a very good concept and as a millennial, I think I would be staying in one after 55-60. But that does not make it a good business or good investment.
This is the tricky part for this business. I would like to present two views - one short term (3-4 years) & one long term (7-8 years).
Short Term View (3-4 years)
Over next 4 years, company plans to add 900 beds, taking total bed count to 3400. One can assume Max India’s share at 1700 beds. Assuming 2Cr per bed gives valuation of 3400Cr, assuming 2.5Cr per bed gives valuation of 4250Cr.
The company has EBITDAR per OBD of 20L. At 1700 beds, this gives EBIDTA of 350Cr for Max India. Assuming EV/EBITDA multiple of 15 gives, valuation of 5200Cr.
On non-going concern basis, Max Bupa is actually worthless as cost of float at 9% is about same as cost to get the same amount from financial institutions.
But I feel the right way to think about investing in Max Bupa is as a venture capitalist or PE fund (something like investing in Ola etc.). At such small revenue numbers, the business would not even have been listed but fortunately it is listed and retail investors can own it. The investment time horizon needs to be 5-10 years for Max Bupa I think.
On going concern basis, insurance business needs to be valued at Indian Embedded Value (IEV) but it is beyond my skill set to compute that.
What I have observed is, for general insurance company offering non-participating products, I feel insurance company can be valued at some multiple of float. There are two parameters that are important in growth of float - underwriting profit/loss and how much, investment record.
For a company generating float at small cost (small underwriting loss, 2-3%) & average investment record (8% yield), insurance business should be bought at discount to float.
For a company generating float at underwriting profit (2-3% or more) & average investment record (8% yield), insurance can be valued at float or some small multiple of float (1.2x-1.5x). If investment record is exceptional (12%+ yield) & underwriting profit, business can be bought even at 2x float.
At current stage, max would be valued at 600Cr kind of valuation. Bupa bought 23% stake at 207Cr in FY16, valuing business at 800Cr. I expect this business can be valued at 2000Cr in 3-4 years.
This gives valuation for Max India in the range of 5500Cr-7200Cr in next 3-4 years.
Long Term View (7-8 years)
If company does manage to get 5000 beds, then at 20L EBITDA per bed, EBITDA comes to 1000Cr. Assuming EV/EBITDA multiple of 15, Max India’s share would be valued around 7500Cr. If you add rising healthcare costs + more operational efficiency, this business can be valued at 9000-10000Cr.
For Max Bupa, I hope it can be valued at 3000Cr.
Disc - I am invested in the stock and my views are biased. There might be errors in my valuations/assumptions or they can be completely wrong. I am not SEBI registered analyst. Investors are advised to do their own diligence before investing in the stock. Stock constitutes more than 5% of my portfolio and no transactions in last 30 days.