Higher FDI in insurance key trigger for Max India

Most of its businesses are gaining traction but analysts see limited upside

The buzz that higher foreign direct investment (FDI) in insurance would be allowed has been the key trigger for the recent rally in Max India’s scrip. The Street believes a stable regulatory environment and improvement in inflation and economic growth will benefit such companies.

Fundamentally, too, Max India has put up a good show by increasing its market share in life insurance (Max Life) and improving the profitability of health insurance (Max Bupa). Mitsui Sumitomo, Life Healthcare SA and Bupa Finance own 26 per cent stake in Max Life Insurance, Max Healthcare and Max Bupa, respectively.

Max Life is the only firm to witness continuous growth in new business premiums (up 17 per cent for FY14). It also increased its market share to six per cent of the private life insurance business. Analysts estimate new business premiums to grow at 15 per cent.

Max’s health care business primarily operates speciality hospitals, having 1,440 operational beds across India. While the earnings before interest, taxes, depreciation, and amortisation (Ebitda) of existing hospitals stood at 11.7 per cent in FY14, new hospitals continued to make losses. Analysts expect the overall business to start making profits from FY15. The company plans to raise money to fund further expansion of this business. Its health insurance business would also need another Rs 200 crore in the next few years and could benefit significantly from bancassurance tie-ups. For now, with capital infusion in place, the market should start gaining greater confidence in these two businesses, say analysts.

"In the insurance space, we expect Max India to be first on the block to capitalise on improved macro outlook, given its superior quality of book leading to best-in-class conservation ratios (indicates repeat business); and strategic partnership with Axis Bank. These, along with huge scalability potential in its health care business and potential value unlocking in other nascent businesses, will aid Max India," says Nilesh Parikh of Edelweiss Financial Services.

However, there is a flip side. The draft Direct Taxes Code (DTC) Bill proposes to raise corporate income tax for life insurers from 12.5 per cent to 30 per cent. Until the new government takes a call, it will be an overhang on the stock.

Meanwhile, the remaining two businesses -- speciality films (high barrier polymer films for the packaging industry) and clinical research (Max Neeman) have also witnessed good growth in FY14. Analysts, however, say the company is scouting for strategic investors to grow its speciality films business and may eventually sell it off.

While most analysts remain positive on Max India, the average target price of Rs 315, according to Bloomberg estimates, suggests the scrip (at Rs 303) is fairly valued. Buy on dips, advise analysts.