New business margins are between 18% and 20%: Max India

Deutsche Bank has came up with an upgrade for Max India and suggested that it is the best listed proxy for life insurance companies. The fundamentals of the company are strong, says Rahul Khosla, Chairman of Max Life Insurance in an interview to CNBC-TV18.The value of the new businesses, return on embedded value, the net business margins and the new business margins are all between 18-20%, he said.Khosla was referring to the recent demerger of the company which resulted in three companies — Max Financial Services, Max India and Max Ventures and Industries Ltd. Max India and Max Ventures and Industries are yet to list, and we are expecting all approvals by early to mid-May, he added.  Asked about the cash component in the three companies, he said, around Rs 100 crore was distributed in Max Financial Services, about Rs 350 crore in Max India, and Rs 15 crore in Max Ventures and Industries Limited. "We are a debt-free holding company. We have zero debt in all our three entities," Khosla added.Below is the verbatim transcript of Rahul Khosla’s interview with Latha Venkatesh & Reema Tendulkar on CNBC-TV18. Latha: Deutsche Bank came up with an upgrade for your stock suggesting that is the best listed proxy for life insurance companies so can we get some comment on that from you? A: They are right. The report captures it well that this is pretty much solid company with the solid fundamental strength. Obviously, they have quoted it right that this is a very best stock to buy if you want to pure play for a life insurance. Let me tell you where we certainly obviously agree, which is that the fundamentals of the company are very strong whether you look at growth in the value of the new business or you look at the return on embedded value or you look at the net new business margins that we have. Reema: Can you tell us whether the group restructuring is over right now or not? A: The fundamental restructuring that was announced is clear and it is in the public domain. What is now left to do is that the resulting two companies which is the new Max India and the new Max Ventures and Industries Limited those two companies are yet to list. We are expecting all of our approvals including Foreign Investment Promotion Board (FIPB) approvals and all of the listing formalities to be completed hopefully by early May or mid May therefore we expect our listing to be done around then. So, that is the last set of steps to be taken to complete the de-merger process. Latha: Your company’s market share came down because of very strong growth by the competition. How do you see the market shares going ahead? A: My answer to that question is that as a board and as a company we focus very much on making sure that our product portfolio reflects our strategy of selling, long-term savings and protections. So, what we don’t do unlike several other private players, we don’t chase market share or growth based on the state of the equity markets necessarily. So, you will see several players whose percentage share of portfolio of Unit Linked products varies very widely. In FY 16 if you recall, in the early part of FY16 there was quite a upsurge in the markets and therefore Unit Linked products became far more popular. Several of our competitors were selling substantially Unit Linked products which we did not do. Our share and I would argue that our share would continue to be around the double digit mark as it has always been. However, it will be composed of the right mix of products like I said is focused on traditional products. Approximately, 70 percent of our products sold are traditional products. Latha: What has been the trend of premium growth in the fourth quarter and therefore what are your expectations for FY17? A: Our guidance has been that we will grow our book in the high teens somewhere around there between 15 and 18 percent. We are comfortable making that sort of number. However, like I said before and I am repeating myself it will be on the back of a very clear preference, continued preference for selling traditional products. Like I said even for our growth of value of new business we are expected to grow between 18 and 20 percent. We expect margins to hold at around 20 percent as well. Reema: Will you be able to sustain the new business margins over 20 percent over the next one or two years? A: Yes, for sure because again our focus is very much like I said on both the non-par chassis as well as protection products. So, for us that is where we believe that we will focus on and therefore we certainly expect to hold up the margins that we have got so far which is around the 20 percent mark. Reema: If you could help us with the cash and the debt levels on all the three group entities? A: We are zero debt in any of three holding companies. We are a debt free holding listed company. That is a very big point. The cash has been distributed, approximately Rs 100 crore in the first company which is Max Financial Services, approximately Rs 350 – 400 crore in the new Max India and a very small amount of Rs 10-15 crore because we don’t need the cash in Max Ventures at the moment. So, that is sort of the division of cash that we have done so far. As I said earlier it is a debt free holding company in all three cases. Again, it is rare to find holding companies with zero debt, adequate cash and terrific quality assets on the underlying subsidiary companies. So, good luck to your holdings. Latha: What about the valuation of the health arm? A: I certainly join you in your sentiment that everybody would like to own Max India. I would argue that everybody should like to own all three holding companies because I think there are different opportunities in all of them. As I have mentioned to you Max Financial Service is very strong pure play, yes, I think the new Max India will have health and elite services and as you know there is a lot of interest in this sector that we play and quite frankly we are very well positioned here. To your question on valuation, time will tell. All we know is that we have done some seminal transactions already on the healthcare side which you are very well aware of which were quite salutary in terms of sorts of valuations that we could command. Again, the valuations for good quality healthcare providers and in that space have just recently been demonstrated through the IPOs that have just happened. Both at provider level as well as at a diagnostic level. I have no doubt that this is a really solid asset waiting to be exposed and this is a great opportunity because in the past with a consolidated conglomerate Max India the ability to shine the light on great asset like Max healthcare for example was somewhat of obscured. Now with the new listing that we are expecting this will really be a very big focus for investors as well. So, we are very confident of the growth. The last thing I would say on that is that particularly on the healthcare side we have invested significantly two acquisitions that you are aware of one in east Delhi and one in Saket. Those gave us an outstanding headroom for growth both in terms of capacity occupancy and profitability. So, this is an asset to watch and I would join you in your sentiment to saying we should own more of it.