I wrote a small write up on Google sites to better my understanding on the Max India restructuring (record date of 15th June 2020). Direct Link shared at the last, with my analysis replicated below.
Towards end of FY 2018, KKR led Radiant Life bought out the 49.7% stake in Max Healthcare held by South Africa based Life Healthcare (JV partner of Max India). With this transaction as the genesis, Max India along with KKR led Radiant Life, Max Healthcare and Advaita Allied Health Services (newly formed 100% subsidiary of Max India) came up with a composite scheme. Ahhhh i am lost!!!
To simplify the Main Points are:
- Max India spins off its non-healthcare business to Advaita. For every 5 shares of Max India, shareholders get 1 share in Advaita .
- The residual healthcare business (covering 14 hospitals) in Max India is merged into Max Healthcare. For every 100 shares of Max India, shareholders get 99 shares in Max Healthcare. Do note Radiant also is merging its healthcare business (2 hospitals) into Max Healthcare. Refer to the Composite Scheme Pre-Post Shareholding Breakup section to understand the capital structure of the companies.
- Record Date is 15th June 2020 as per exchange release by company.
- Max India in current form ceases to exist.
- KKR will acquire additional 4.99% in Max Healthcare from Max India promoters, after the completion of the Composite Scheme.
The 4.99% buyout is estimated at a price of Rs.80 in the Radiant Life Corporate presentation (similar price was paid to Life Healthcare for its 49.7%), and is the interesting piece of this evolving puzzle. At Rs.80, this values Max Health at Rs.7,232Cr (90.4Cr shares as per Composite Scheme Pre-Post Shareholding Breakup below). Max India’s future stake of 29.39% gets valued at Rs.2,125Cr.
Current Market Capitalization of Max India is Rs.1,640Cr @ Rs.61 market price per share as of 29th May 2020. A discount of nearly 20% by the market?? Is this a Valuation Mismatch Opportunity or a Value Trap? Lets value the Max Healthcare and Advaita parts of the business to identify the opportunity.
Max Healthcare Valuation: Let’s investigate this based on one of the simplest valuations metrics i.e. EV/EBITDA. Run a query on tijorifinance.com to narrow it down to top 3 listed hospital chains, i.e. Apollo, Fortis, and Narayana Hrudayalay. The 3yr average EV/EBITDA range is 21 to 25.
EV = Enterprise Value derived by the Market Capitalization and Debt employed by the company.
EBITDA - Earnings before Interest, Taxes, Depreciation and Amortization
“tijorifinance.com” data as of 29th May 2020
Take the conservative EV/EBITDA of 20 for our valuation exercise. (Note: Duff and Phelps in their India industry multiples study Page 40, give a mean/median valuation of 20 EV/EBITDA for the Healthcare sector)
The formula for EV/EBITDA = (MCap + Debt)/EBITDA.
MCap = (EV/EBITDA * EBITDA) - Debt
- Radiant Corporate Presentation Slide 27 lists the Debt=1734Cr. EBITDA=427Cr
MCap = (20 * 427) - 1734 = 6806 Cr (Very Near the 7232Cr valuation given by KKR). Taking this 6800Cr as the conservative equity valuation, on the 90.4Cr odd shares after Composite Scheme, it works out to Rs.75 per share of Max Healthcare.
Advaita: As per Max India Q3FY20 business update presentation slide 10, considering the conservative approach, and taking the fair value or invested capital we have the following parts:
- Antara 1.0 - 134Cr (Fair Value)
- Antara 2.0 - 110Cr (Invested Capital)
- Cash in Hand - 516Cr (200Cr will be returned to shareholders eventually, with rest retained for future needs)
- Max Towers - 93Cr (they also say annual lease rental of 6Cr or >6%p.a. return on invested 93Cr)
Total = 853Cr or Rs.159 per share of Advaita (5.37Cr shares as per Composite Scheme Pre-Post Shareholding Breakup below)
To Summarize, Our conservative valuation gives a Rs.159 per share of Advaita and Rs.75 per share of Max Healthcare
Final Rundown - Assume you buy 1000 shares of Max India @ Rs.61 (market price per share as of 29th May 2020), that is Rs.61,000 invested. After Composite scheme,
- You will get 200 shares of Advaita.
- You will get 990 shares of Max Healthcare.
Short Term Horizon:
At our calculated fair prices derived above, the total values will be, 200x159 + 990x75 = Rs.1,06,186 (a 74% absolute gain on a Rs.61,000 investment) . If both the stocks list at premium to these conservative figures, then we have a possible multi-bagger.
When do i lose? If market discounts the above conservative valuation by another >58%. At 58% we break even i.e. 200x92+990x44=Rs.61,588
Note:
- Advaita has kept 200Cr aside for returning to shareholders who may not want to continue in the future roadmap. This 200Cr might be used to buyback Advaita shares through tender offer for upto 1.25Cr shares (assuming Rs.159/share). This approach also will bump up promoter shareholding beyond 50% giving larger control on deploying the balance 300Cr cash.
- I am not considering the listing timeframe here. The NCLT approval has been completed, and received. The time consuming part could be the listing of the company shares, as they need exchange/SEBI approvals. Per Max India they expect the listing of both companies to be completed by August 2020.
Long Term Horizon:
- KKR is a PE investment firm with mandates to exit investments in 10-15 yr periods. With the Radiant investment in 2017, they might be having a solid 7 to 12 years more before they exit. Usually PE firms generally have a good records over longer terms, and they run the companies with clean slates. Good for minority, small shareholders. But note this is not a guarantee for success always.
- Hospitals and Healthcare is a growing evolving industry in India, and has bright prospects, as currently we spend lass than 3% of GDP on healthcare. Also increasing insurance penetration should help hospitals with the tailwind.
- Regulatory challenges are there with Price caps on surgical devices, procedures and accusations of price gouging. But as the industry evolves, the runway for quality healthcare is big enough over the next 2-3 decades. Max healthcare could be one of the prime beneficiaries.
More clarity will be available once Max Healthcare and Advaita list, and the companies disclose their future plans with regard to merger synergies, business roadmap, buyback, etc activities. We also need to account for the fall in market valuations (reflected to some extent in Max India stock price), but other healthcare providers in similar space are being valued at 20x EV/EBITDA in current market.
My writeup link: https://sites.google.com/view/prudentsteps/home/max-india