Max India has target of Rs 400: Rajen Shah

Max India has target of Rs 400, says Rajen Shah, CIO Angel Broking.

Shah told CNBC-TV18, "I strongly believe that when you buy a value stock which is growing at a very good pace of more than 20%, the probability of losing money is very remote and making money over a three year kind of timeframe is immense. In short, what I mean is that the risk is very low and reward is very high when you buy a stock which is a combination of value and growth. Max India is one such stock which we believe is a strong value cum growth play. Now when we talk about value, if you do the sum of part valuations of all the businesses it is in, you would realize that the marketcap is half of what the true value of its businesses is."
He further added, "Max India is basically into about five businesses. One is the life insurance business, one is the healthcare business, the hospital business, the third is the Biaxially oriented polypropylene (BOPP) specialty packaging business, fourth is a clinical research and fifth which is on the verge of a takeoff is the health insurance business."
"Max India owns about 70% stake in Max New York, which is now Max Life Insurance from yesterday onwards because New York is now out. Now based on the deal it did with Mitsui Sumitomo wherein it sold about 9.37% kind of stake at about Rs 985 crore. The value of its 70% holding in this insurance venture works out to around Rs 7,400 crore. So that is one part."
"Second business is the healthcare business, which is the hospital business; it again holds about 71% kind of stake in this venture. The value of that we have worked out is about Rs 1,400-1,500 crore and this is based on the two transactions, which the company did in the month of March and May this year wherein it bought shares from certain investment companies, which wanted to exit this healthcare business at about Rs 50 per share from this company pumping in about Rs 72 crore, they bought about 1.42 crore shares or so. Based on that, we arrived at a value of about Rs 1,400 crore for its stake in the hospital business, so Rs 7,400 crore plus Rs 1,400 crore that works out to Rs 8,800 crore."
_PAGEBREAK_
"Now the BOPP business wherein the company has expanded the capacity by about 70% over the past two years that we believe and the company is looking out for a buyer for this business because it wants to now move out of this business because it is sort of unrelated to the businesses which it is into. So I think that would fetch the company around Rs 650-700 crore. So Rs 8,800 crore plus Rs 700 crore that is about Rs 9,500 crore and if you give Rs 500 crore to the clinical research business and the health insurance business, which has just started operations and which is on the verge of a takeoff, I think the total value of it assets it owns is about Rs 10,000 crore whereas the marketcap is Rs 5,000 crore. So that makes it a very strong value play."
"Coming to the growth part, the businesses which it is in, the insurance business, we all know what kind of potential this business holds. I believe that insurance is at that point where telecom was about twelve years back and then we saw spectacular growth in the telecom business. So same is what I expect from the insurance business."
"Number of people insuring in India is much lower than the world average. I think this business has to takeoff. So this business and premium collection in case of Max over the past five years had grown at about 35% CAGR. I don’t expect this strength to continue but certainly the premium collection would grow at about more than 20-25% for the next few years. That is one part."
"Secondly, the healthcare business, the company had about 1,100 beds two years back and right now there are about 2,000 beds. So it has doubled its bed capacity in hardly about 18-24 months. So this business also is doing very well and looking at the state of healthcare industry in India, which is poor and pathetic, I think that the growth potential in the healthcare business in India is huge."
"The number of bed per thousand people in India is less than 1 whereas the world average is about 3. So the potential in both these business, healthcare and the insurance is huge. The third business is a BOPP where last year it grew at 55% in BOPP business, this year it should be growing at about 15-20% but this venture they are exiting. So that should fetch them good money."
"The Max Bupa Health Insurance business has just taken off. Last year was the first year of operation and the company is expecting very good growth in the coming years. So I think all these businesses are going to grow at a very decent pace. So it becomes a strong value and a growth stock."
"If you see the financials, last year it reported Rs 155 crore of net profit vis-à-vis Rs 9 crore of net profit that was a huge jump and this year besides the exceptional profits of about Rs 660 crore, which it will make from the buy and sale transaction it did with New York Life and Mitsui Sumitomo respectively. It should report about Rs 225 crore of profit resulting an EPS of about 9. So if you look at a P/E you will feel 20 times the stock is fairly priced. But looking at the growth potential and the value, I think P/E is not something that you need to look at in this company."
"One more interesting point is that last year, I think July or August, the promoters had taken up 80 lakh shares, they subscribed to 80 lakh shares at a price of Rs 217 pumping in about Rs 175 crore and that took their stake up by 3%. When the promoter is putting Rs 175 crore at about Rs 217, I think we should not be worried about putting money at about Rs 192. So we have a three year target of about Rs 400 for Max India." Disclosure: I have no personal holding in the above stock.