Rising healthcare focus a fillip for Max India

With the growing economy and stressed schedules, lifestyle-related and other diseases are on the rise. This along with rising population calls for better healthcare and insurance facilities. Max India Ltd is poised to benefit from the growth in these sectors.

Business: Max operates in the life insurance, healthcare, clinical research and healthcare staffing businesses apart from making specialty products.

Insurance: This segment contributes around 84% to Max’s revenues. Its joint venture with New York Life called  Max New York Life is the 7th largest private insurer in India. It offers individual and group life insurance products and solutions through a strong distribution network.

Max’s gross premium for September 2009 grew 26% year-on-year growth. Though its first annualised premium earnings (APEs) decreased 21% in the first half of this year as compared with the last year, things are improving. Max has increased its share among private players in APE growth. Max has a balanced portfolio of products with ULIPs contributing 56% to overall policies. Max has much better conservation ratios (the share of renewal premium in the total premium) at 82% than other private players.

Further, its agents’ force, which contributes 65% to the total sales, is one of the efficient in the industry.

The average tenure of Max’s products is 22 years with average age of insured being 35 years which is better than industry average.

Max has been reporting losses on account of expansion efforts in its life insurance business, which increased to Rs 333 crore in FY09 from Rs 60 crore in FY08. Max plans to increase its distribution reach significantly which would involve huge capital infusion.

Healthcare: This segment contributes 8% to revenues. Max through its subsidiary Max Healthcare operates a network of six super-specialty hospitals and two specialty medical centres in NCR. The company engages in the business of construction of hospitals and leasing of medical and other equipment.

Max also provides clinical research services to various medical organisations and engages in healthcare staffing activities comprising sourcing, training and placing of healthcare personnel.

Max has recently entered a partnership with Punjab government to build two multi-specialty hospitals in the state by 2011. Max is expanding its healthcare operations to add another 1,000 beds to the current 770 by FY12.

Specialty products: Max produces specialty plastic products such as niche and high barrier bi-axially oriented polypropylene (BOPP) films, thermal lamination films and leather finishing foils.

Flexible packaging industry is growing at 8% globally and there is a shift from PET to BOPP which will increase demand. This division is increasing its capacity from 29,000 TPA to 49,000 TPA in the next 2 years.

Investment rationale: The insurance industry is expected to grow at 15% led by aggressive expansion by private players. Higher efficiency of its distribution force, increased reach, balanced mix of traditional and new innovative offerings along with young customer profile will drive growth in Max’s insurance business. Experts expect a change in the FDI/FII regulation in the future which may act as a trigger for the stock. 

In healthcare, Max would benefit from its expansion drive, leadership in highly critical tertiary care and relatively lower medical costs in India. Healthcare insurance provides one more avenue for the company which is starting a JV to enter healthcare insurance business by March 2010.

Concerns: The local insurance industry faces regulatory risk with frequent amendments. Also, volatility in stock markets and economic conditions may lead to de-growth in ULIPs and higher-premium products. Higher competition and rising expansion costs may lead to further losses.

In case of healthcare business, any delay in execution will lead to higher costs. Both insurance and healthcare business would need longer timeframe to break even.

Valuations: Max has reported consolidated revenues of Rs 4,166 crore in H1, FY10 as compared to Rs 2,245 crore in H1 of FY09. The consolidated losses have come down from Rs 268 crore in H1 of FY09 to Rs 87 crore in H1 of FY10.

Being into diversified businesses, valuations have to be based on sum of the parts (SOTP) method. Max derives majority of its revenues from insurance business, which cannot be valued in financial terms. Based on SOTP valuation and in view of its diversified business model in two growing industries, investors can keep an eye on the stock from long-term perspective.

Disclaimer: The writer does not hold any share in the company