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Max India - Demerger, Will sum of parts be greater than single entity

In Jan’ 2015, almost a year back diversified firm Max India spin off plan were announced management indicated it is splitting listed entity into three companies with the existing firm becoming India’s first listed company with insurance as the sole business.

The Max India Group is a multi-business corporate, the listed entity has following primary business

  1. Life Insurance – As a 74: 26Joint venture with Mitsui Sumitomo of Japan

  2. Max healthcare – Operating as equal JV with Life group of South Africa

  3. Health Insurance - As a 74: 26 Joint venture with BUPA of UK

  4. Antara – 100% owned retirement living real estate venture

  5. Max speciality Films

Last year the conglomerate began a demerger exercise which will result in listed company being spilt into three listed companies as per below

Source – Investor presentation, Nov 2015

In this brief post we try and examine if the sum of parts would be greater or lesser than the current M-cap, Let’s go to the drawing board.

Max Financial services – The largest piece of the spun
off entity is a well-established life insurance provider in India. Life
Insurance is a crowded place in India were on one hand we have behemoth LIC,
while on other hand you have well-funded strong private players like ICICI
prudential, HDFC Life and SBI. Apart from them there are more than dozen
challengers all gunning for the growing middle class population in the country
where life insurance is abysmally low even compared to developing countries.
It’s a highly competitive market with lot of pricing pressure on incumbents
specially from new challengers. However the size of pie will ensure all players
will have decent opportunity to grow.

Max Life insurance is currently 4th largest private life insurer, it claims to have Industry best margins and RoEV
an industry term which expands to Return on Embedded Value (in life insurance).
RoEV shows the after tax profit as a percentage of the equity on an embedded
value basis (ie valuing all existing contracts at present day values).

Insurance is a very difficult business to value and Buffett also touches on what makes valuing an insurance company difficult. An investor has to trust that the firm’s actuaries are making sound
and reasonable assumptions that balance the premiums they take in with the future
claims they will have to pay out as insurance payments. Few errors can ruin a
firm, and risks can run many years out, or decades in the case of life

However we have some pointers,

A) In August 2012 the life insurance piece was valued at INR 10,500 Crore

Japan’s Mitsui Sumitomo Insurance Co. Ltd said it will purchase a 26% stake in Max New York Life
Insurance Co., a joint venture between Max India Ltd and US-based New York Life
Insurance Co., for Rs2,731 crore in an all-cash transaction.

The transaction values Max New York Life at more than Rs10,500 crore and is the second largest foreign
direct investment (FDI) in the Indian life insurance industry.

Max Life bought Axis Bank’s 1% stake in the same year at INR 103.5 crore valuing the full business at INR 10,350 Crore with a put option to acquire remaining 3% stake in Oct’14 , 15 and 16.

However come 2015, There is change in heart

The details of this deal are not out but what made a partner to make a reverse turn ? But overall this a positive move

Also post 2012, the business has gone from strength to strength increasing revenue by almost 40% from FY12 to FY15 and its competitive position improved

if Mitsui Sumitomo’s price paid follows the trajectory of revenue than this piece could be worth
around ~INR 14700 Crores

B) There is another way to look at lifeinsurance business, Insurance operations are often acquired at multiples of
embedded value (EV) , Embedded value is the value of in-force business plus the
value of the free capital. The management has indicated that recent deals in
insurance industry has happened at 3X EV.

Source -

as per November 2015 analyst presentation
EV of life insurance business is INR 5363 Crore and to complicate matters Max
India has moved to market consistency method in last fiscal. The Market
consistency method overstates EV. So we have to work with EV based on
traditional method.

In above tables items in yellow are estimated EV based on traditional method, therefore EV is INR ~ 4754 crores.

Based on above market value of life insurance business could be around ~INR 14,260 Crores using Traditional Method and ~INR 16089 using the market consistency method

With above two data points and make no mistake, I am no insurance industry expert so take everything I am writing with a pinch of salt.

The value of Life insurance business would be between ~INR 14250 crore to ~ INR 16000 crore. Max India’s share with 72% ownership would be around ~INR 11000 Crore

Max healthcare business – This is the second largest piece of this spin-off, This entity will have three business under its umbrella

Health Insurance – In 74:26 JV with Bupa, In November 2015- Bupa announced that it is paying INR 191 Crores for 23% stake in health insurance business, This announcement pegs the value of health insurance
business at ~ INR 830 Crore. With a 74% share, Max India’s share would be ~INR 615

Health care (Hospital) business – This business is in recovery mode, They are very much north india focussed business. Looking atFY16 profit and assigning a PE ratio would be inappropriate to put a value on
this business. leading brokerage use EBITDA multiple. For H1 FY16 EBITDA was
~97 INR Crore, with a full year estimate of EBITDA of ~INR 200 Crore and using
a multiple of 12, the value of health care business could be around ~INR 2800
Crore. At corporate level the company is almost debt free so no debt is
deducted for this calculation. Max India owns half of this business so their
share would be ~ INR 1400 Crore

We have used 14x exercising some conservatism

ICICI Direct has used 16x for Apollo in
August 2015, However Apollo is market leader with better ROCE than Max India

Antara – A 100% owned retirement living real estate venture. This business
is in development mode the management has commented below in FY15 annual report

Senior Living as a business represents a tremendous opportunity in a nascent market and Antara
Senior Living is extremely well positioned to execute the Dehradun project
successfully and review opportunities for building its next community in the
NCR region.

FY 15 it lost 50% of its net worth,
Although Management is optimistic about its future, I can’t a put a number to this component so we value this piece as ‘Nil’

So overall Max India’s Max Health care share could be roughly valued at ~INR 2000 Crore

Max speciality Films – This will be the smallest spun off entity with FY16 estimated annual turnover of ~INR 800 Crore and EBITDA of ~INR 100 crore. Another blogger has
done some great work on this piece of spin off – read here

At average industry multiple the value of
this piece should be around ~INR 500 Crore, However if we go by what promoters
are saying this piece of business is valued at ~INR 168 Crore. In Jan’15 – this
is what promoters have said,

The promoter of Max India, Analjit Singh,today announced his intention to make a voluntary open offer for buying upto an additional 34.5% stake in Max Ventures and Industries Limited (MVIL), which
will be listed post the demerger of Max India, as announced earlier today, and
which will hold the investment in Max Speciality Films Limited (MSF Ltd)…. listing
of MVIL at an approximate valuation of Rs. 168 Cr. for 100% of MVIL.

On conservative note we will assign a value of ~INR 250 Crore for this piece of spin off.

Putting the jigsaw together

At the current m-cap we are paying about 5% premium over our conservatively build total value of each unit. There is no free lunch on offer here but bear in mind most of business are growing and now
they will get undivided dedicated management attention. Also life insurance business is not directly listed in India so may see some traction with investors. In past this kind of spin off have resulted in value unlocking.

I will be delighted to get more inputs from
you especially special situation experts and insurance industry specialist as I am completely new to this area

Disclosure – I am long with a tracking position to see how event unfolds.

Caution – I have made many mistakes in past in analysing spin off situations, please use discretion

Originally posted here -


@vivekbothra - Hi Vivek,

I am long on Max for nearly 4 years now. I use a similar sum of parts valuation to value it. Based on my simplistic method, it is at 9% premium at cmp of 490.

Potential upsides in valuation - Better valuation for hospital business (am using old value), value for Antara housing
Risks in valuation - over-estimation of Life insurance.

I am not expert in valuation. Please treat this with caution.



I feel Max India should do well in the long run due to the fact India is hugely under penetrated on Insurance. So going forward, I feel all players in this sector would do well. Hence I like Max India as a long term theme. Having said that, sometimes long term can test your patience!

Demerger would bring back the focus on individual business and improve market cap of all its demerged companies as seen in many recent demerger situations. For eg. Majesco, Intellect Design Arena etc although Max is in different sector.

Disc - Invested for last 6 months with average price of 470

1 Like

Hi ,

if we purchase now, will we be applicable for split or is it trading ex split.

In some forums they mentioned april 1st 2015 was the ex split date. Can some one please calrify.

@pkalapal, ex date is not announced yet.

@All, as per recent disclosures, a lot of pledge/encumbrance has been created by the promoters on their shareholding. Any idea why this could be for?

Disc : Invested from lower levels and added recently.

Pledging disclosure today from Max India - Max investment ventures has pledged 2.67% with Aditya birla finance

I wonder why the max india stock price fell by about 26% on NSE, when the demerger date was 28.01.2016. Is it already trading as Max Financial Services?

Yes. It is quoting ex scheme of arrangement that involves three companies.

Max financial services which has demerged is available at market cap of 9500 cr (2.5x EV). Is it a good bet for the long term given that it is at a 15-20% discount to other life insurance players and very high likelihood of selling out to a foreign player at a higher valuation

Max Life to merge with HDFC Life…

Although valuation is yet to be finalized, looking at the share price of Max Financial services Ltd, (which has reached to the pre demerger level) sum of parts is clearly becoming bigger than single entity.

Disc : invested. No transaction in last 90 days.

I have a big question on one small point which is not yet discussed till now. What will be the stance of Max Life’s Bancassurance (Banca) partners? I will try to elaborate why it is important, albeit, based the current available information.

As per the terms of merger, first Max Life will merge into Max Financial Services. Then Max Financial will get merged into HDFC Life. Logically then, the brand ‘Max’ would cease to exist and the total business would be carried out under HDFC Life brand. It is worth noted that about 68% of Max Life’s business is contributed by Banca (with two prominent partners as Axis Bank and Yes Bank - to the best of my knowledge). Out of this, Axis Bank’s share is 60%+, which is also a significant minority shareholder in Max Life (holding 5.99%).

Will these banks like to endorse the HDFC brand ?? I am skeptical, as when you say HDFC, the picture comes to mind is that of HDFC Bank (or the HFC), so it will be like selling competitor bank’s products. If not, that will be a big knock for Max Life’s Banca business.

All this is just a worry / thinking ahead of time as no concrete info is available. It is likely that Max Life would have taken consent from their partners, so this question may not even arise in future.

Disc : Invested. No transactions post demerger.

1 Like

Hi @Advait_6270, I think this news answers some of your questions"?port_flg=yes&utm_source=MC_INMAIL_NEWS"

Max Venture got listed today and got locked in upper circuit as Analjit Singh is interested in buying back stock to raise stake to 75% . Please see the news items below -

Link to tweet by barinder bansal of cnbc 18. Looks like MAIL has a lot to go. Interesting even if v give a ev/EBITDA of 10 the stock can be a ten begged.

And now comes this news that Axis Bank has tied up with LIC for distribution of its Insurance products.This is disturbing…

This will definitely dilute some business of Max Life…

Good article about Max Life HDFC Life merger in Outook Business

As of now, considering the demerger ratio and CMP of all the 3 demerged entities, the demerger played out well for minority investor. Going forward, insurance business will continue to remain challenging.

Please read recent article in Economic Times

Considering the fact that Analjit Singh wants to make Max Ventures as his investment vehicle into new businesses, I think this company will be most promising for long term investors. Analjit Singh have shown his shrewd business acumen to spot opportunities so if it plays out well, this would be wealth creator for investors who is ready to take ride with him.

Disc: Holding shares in erstwhile Max India before demerger. No new additions post demerger. Waiting for right time

A writeup on Antara project for senior living.

Is Max India attractive at CMP (157.00) ?

Some good discussion on Max India happened in this thread on PF
Dhwanil's Portfolio

News on max healthcare stakesale,

Promoters share will increase to finance acquisition of International Finance Corp’s stake

BSE notification

disc: invested today in a small tracking position of 0.7% of PF

(I think this company will be most promising for long term investors.)…Do you mean MAX Ventures here or Max India?