Healthcare business EBITDA grew 60% in FY15: Max India

A: We have had a good quarter; in fact we have had a very good year. Obviously some of the transactions that have happened during the year have added to the profitability on a full year basis but even on an operating basis without those transactions we have reported very pleasing results with 18 percent growth in revenues and a 22 percent growth in Earnings before interest, tax, depreciation and amortization (EBITDA), so basically all our operating businesses have done very well. In particular I wanted to point out that our healthcare business has turned around significantly and has registered a significant increase in its EBITDA, close to 60 percent over last year and Max Life as usual has also outperformed its plan as well as last year and the plastics business as well has done very well registering a growth of almost 40 percent in its EBITDA.

Anuj: Let us talk about Max Life a bit. What is the embedded value? I believe that you would disclose that today and how does that compare to the year back?

A: So, the first thing is the embedded value of Max Life, we have just changed the methodology and have adopted what is known as a market consistent embedded value methodology of calculation. So, on the March 31, 2015, the embedded value stands at Rs 5,232 crore based on this new methodology. Importantly, the return on this embedded value (EV) for 2015 is as high as 28 percent and when you look at the value of new business during 2015, that was Rs 460 crore with a new business portfolio margin at 23.4 percent. So, this basically marks Max Life’s transition to using a market consistent methodology which reflects the risks quite explicitly in the insurance and economic risks and it is a more bottoms-up approach to valuation. So, that is where the EV stands. If we had used the same methodology last year instead of Rs 5,232 then that EV would have been calculated at approximately Rs 4,400. So, it is a very strong growth that has been registered.

Sonia: That is a substantial jump that you are seeing in your embedded value, so based on this embedded value, what is the valuation that you would be expecting for Max Life now?

A: If you go by market multiples that are being talked about anywhere between in the high two’s to the early three’s, you could apply roughly a three times multiple to this number and come to a significant valuation of close to Rs 16,000-17,000 crore, some where there and so that is a very strong reflection of the quality of the asset and the growth that has come with a lot of effort in terms of product portfolio, balancing risks, making sure that the right products are sold to the right customer through the right channel and preserving margins by intelligently choosing non-power products and mixing them up with the right traditional long-term savings and protection that we do.

Anuj: What is your current market share of incremental life insurance policies and do you have any kind of targets on that?

A: We are the largest non-bank owned private insurance player in the country. So, that position has been preserved by us. If you count all the private insurers which include bank-owned insurers, we are number four. But if you exclude bank-owned insurers who basically sell their own policies, we are number one. Our market share is close to, in the ball-park of approximately 10 percent and we have carefully calibrated that by not going overboard on selling either unit-linked insurance plans (ULIP) or stock market based products. But we also focused on our long-term savings and protection portfolio.

Sonia: Just coming back to Max Life, the Rs 16,000-17,000 crore valuation is quite a hefty valuation at this point. Can you just tell us what the earnings has been for Max Life this quarter around? Last quarter your gross written premiums were at about Rs 2,052 crore, how much has it grown this quarter?

A: I don’t have that number right in front of me right now, we can certainly share it offline with you but basically we are registering a significant growth in the mid-teens over the last year, that is the run rate.

Sonia: Would you be at any stage planning to dilute stake in Max Life?

A: This question has been asked many times. It is a quality asset which we are quite proud of. As you know, we have an investor, a Japanese partner who is at 26 percent. There is therefore the ability both at the operating company level to bring a foreign investment up to 49 percent. So, that 23 percent exits. But also, at the top-core, the holding company level, there is play available for foreign players. Now, we are very carefully having several discussions, because what we want to do is to optimise the right partner with the right valuation at the right time. So we have that option with us and unlike many other insurance companies or holding companies we do not have a contractual obligation to our business partner currently to sell the balance 23 percent.

Anuj: So, are you saying that you are open to selling the balance stake to someone other than Mitsui?

A: We could, we have the ability and the right to do so. And therefore we will exercise what makes most sense to us after we have finished serving the market and optimising our position.

Sonia: Just one more view on max Healthcare. You did mention that the earnings before interest, taxes, depreciation and amortization (EBITDA) has grown 60 percent. That is much higher than the 35 percent growth that you saw last quarter. Is this something that you can sustain in the first half of FY16? And what was the revenues that you saw for Max Healthcare?

A: Basically, let me answer both questions. When you start off from small base sustaining a very large percentage increase is going to become increasingly difficult. All I can say is that for next year as well, the plan that we have put into place is quite aggressive. In fact it grows our EBITDA by almost 40 percent. So, while it may not be 60 percent, it is still a very big growth that we are expecting from our asset. So, that is number one. We hope that by the end of FY16, we ought to be in the ball-park Rs 2,000 crore in terms of revenues over there. So, that is the overall number.