Max India today listed its shares following a three-way group demerger between its life insurance (now Max Financial Services), healthcare (Max India) and manufacturing businesses.
Shares of the company were locked in lower circuit after analysts said the stock was richly valued.
Max India comprises of Max Healthcare units of hospitals apart from Max Bupa general insurance and Antara Senior Living -- but the bulk of the revenues comes from the fast-growing Max Healthcare.
But when compared to peers like Apollo or Fortis, Max India shares may be overvalued, said Deepak Malik of Edelweiss.
"They trade at EV/EBITDA of about 20 times," he told CNBC-TV18. "A similar valuation for Max -- even though it is half the size of the other two -- implies valuation of Rs 120-130 per share," he said.
Below is the verbatim transcript of Deepak Malik's interview to Anuj Singhal, Sonia Shenoy and Varinder Bansal on CNBC-TV18.
Anuj: The listing is at Rs 171 now, the pre-open sell is at Rs 180. Do you think it is a bit exuberant looking at the fundamentals?
A: It looks like that people are very excited about Max Healthcare. We have seen that Max India has three parts of the business, the first part is the healthcare piece, which is the main business for the company which has enormous 80-85 percent of the valuation and there company has around 2,500 beds and it is growing by almost 25-26 percent over the last five years and the EBITDA has grown by 35-36 percent over the last five years. So business is doing extremely well.
Other two pieces are -- one is Bupa Max Insurance business and third is the Senior Living Antara business. So as per our calculation, Apollo, Fortis and all at this point of time are trading at one-year forward earnings EV by EBITDA of 20 times -- if we give the similar kind of multiple to this company, even though the size of the business is almost half of those businesses, the valuations come somewhere around Rs 120-130 and stock is trading at around Rs 170-180. Yes, people are very excited towards this.
Sonia: Since the fair value is around Rs 120-130, do you think that in the very medium-term for investors, there is not much value to be made in this stock and would you recommend avoiding it now?
A: There are a few assumptions, which the street is taking. One assumption is on the healthcare piece and the second assumption is on the other piece. So we do our calculation, we take it at the book value, we are not subscribing much value to the other two pieces because in the other two businesses the company is not making any profit. It all depends on what assumptions one take on its insurance business and its Senior Living business. So when we do our calculation, we give only the book value to those businesses because they are not making any money.
So if you go by our assumptions, only giving value to the healthcare business then I think there is not much upside from these levels.
Varinder: What is the book value for Max Healthcare right now and expected even after two years?
A: The current net worth of the balance sheet is around Rs 1,100 crore for the overall Max India. So around 27-28 crore is the number of shares.
Varinder: Only Max Healthcare?
A: Only Max Healthcare is Rs 750 crore of the total value but one key thing, which people are missing is the company has only 46 percent stake in Max Healthcare. So it is only half of that.
Anuj: What would be the fair price and at what price would you advice fresh buying? Right now because the pre-open is at Rs 180, we have 5 percent downtick right now and that is it for the day. This could be a 5 percent move for some time now.
A: There are two ways to look at it. One is at the book value but then in the book value one has to see they have only 46 percent stake in that and second is on the EV/EBITDA front, so EBITDA they have done around Rs 250 crore, in that their trust businesses give them around Rs 100 crore of EBITDA and Rs 115 crore comes from their own business on hospitals. So around Rs 215 crore, even if you assume that 20-25 percent growth will continue for the next two years and then you see Rs 250-260 crore of EBITDA for the next year and on that, you give 20 times EV/EBITDA and then there is a Rs 1,000 crore of debt on the books. So you deduct that and give 46 percent stake value to them. So the market cap doesn’t come more than Rs 3,000 crore at Max.
So I think let this exuberance settle down and people should realise that they have only 46 percent stake in that. It looks like that people are assuming 100 percent stake in that.
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