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Background

Max India Limited (MAXINDIA | 539981 | INE153U01017) is listed on BSE and NSE (Company Website). From their AR-2019, Max India Limited is a multi-business corporate, is part of the US $3.2 billion Max Group. Focused on Healthcare and Allied business, it owns and actively manages a 49.7% stake in Max Healthcare, and a 100% stake in Antara Senior Living. Max India earned revenue of 3,688 crore in FY 2019, having a customer base of 7 million. The Company is listed on NSE and BSE. Besides a 40.9% holding by Analjit Singh sponsor family, some other shareholders include New York Life, Briarwood Capital, IFC, Nomura, Doric Capital, HDFC Standard Life and MF AMCs of L&T and UTI Mutual Fund.

In 2016, Max India was spun out of the erst while "Max India" (same name) when the Max group was reorganized into Max Financial Services (holding company of Max Life Insurance), Max India (managing the healthcare, Health Insurance and Senior Living business) and Max Ventures (managing specialty films, real estate and miscellaneous business).

So whats the deal now?

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

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 Valuation

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,

1. You will get 200 shares of Advaita.

2. You will get 990 shares of Max Healthcare.

Refer to Calculations section to calculate your expected shares in new companies & their cost of acquisition.

Short Term Horizon

At our calculated fair prices derived above, the total values will be, 200*159 + 990*75 = 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. 200*92+990*44=Rs.61,588

Note:

1. 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.

2. 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 less 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.

Cost of Acquisition of Shares

Max Healthcare = 40.43%, Max India (Advaitha) = 59.57%

For example: A shareholder holds 100 shares of INR 2 each in Erstwhile Max India before the Record Date 1 i.e. June 15, 2020, and the cost of acquisition of the same is INR 100 per share (Total cost of acquisition is 100 x 100 = Rs. 10,000), such shareholder will continue to hold 100 shares in Erstwhile Max India (and henceforth 99 shares in Max Healthcare) and will also be allotted 20 fully paid up equity shares of INR 10 each of Max India.

Accordingly, the proportionate cost of acquisition post demerger will be as under:

1. 100 shares of INR 2 each of Erstwhile Max India (henceforth 99 shares of Max Healthcare received on merger) : INR 4,043 (INR 10,000*40.43%)

2. 20 shares of INR 10 each of Max India (Advaitha): INR 5,957 (INR 10,000*59.57%)

Refer the company announcement here.

Calculations

Important Updates

• June 11th 2020 last date of trading of Max India (INE153U01017) shares.

• June 15th 2020 is Record date to determine list of Eligible Shareholders to get Max Healthcase and Advaitha shares.

• June 24th 2020 ADVAITA ALLIED HEALTH SERVICES LIMITED (INE0CG601016) shares credited to demat account.

• June 25th 2020 MAX HEALTHCARE INSTITUTE LIMITED (INE027H01010) shares credited to demat account.

• June 25th 2020 Max India (INE153U01017) shares debited from demat account.

• August 21st 2020 Listing Date for MAX HEALTHCARE INSTITUTE LIMITED (INE027H01010 - Shareholding)

• August 28th 2020 Listing Date for MAX INDIA (formerly ADVAITA ALLIED HEALTH, INE0CG601016 - Shareholding).

Post Listing (updated on Sept 10th 2020)

• On 10th Sept, both the stocks (Max Healthcare & Max India - New) were out of circuits, although the listings were completed 2+ weeks earlier.

• Max Healthcare closed at Rs.111, and Max India closed at Rs.53.

• Based on above Short Term Horizon calculation above, Actual realization will be,
  200 shares * 53 + 990 shares * 111 = 10,600 + 1,09,890 = Rs.1,20,490. i.e. Profit of Rs.59,490 (~98%) on an investment of Rs.61,000 in ~3 months.

• The stock prices have seen higher levels in past 2 weeks, but have taken lower end for calculations.

• Regrets on not over committing, but that is risk management.

• Max Healthcare is in my Long Term Portfolio. It is a promising sector, with a capable new individual promoter and a big PE backing. It has scope of expansion and to be a top leader in the Indian healthcare segment.

• Max India needs more analysis since business model is not yet fully tested, although it shows a high potential. It needs watch for the next few years for actual implementation and ground level acceptance of the model.