Max India: Funding long-term growth

The company needs to raise funds as it continues to report a loss at the consolidated level.

The $115-million or Rs 538-crore deal between Goldman Sachs and Max India saw the stock rise 8 per cent intra-day. However, the initial euphoria was short-lived. The stock closed at Rs 228.45, up just 2 per cent over its previous close; the Sensex was up by a marginal 0.24 per cent. This could, perhaps, be on account of the market believing that the deal was sweeter for Goldman Sachs.

Post shareholder approval, the investment bank will be issued compulsorily convertible debentures. On or before 15 months, these will be converted into equity — giving Goldman a 9.4 per cent stake in the expanded base of the company — at Rs 216.75 per equity share, which is a tad less than Friday’s closing price. Till then, the debenture will carry an interest rate of 12 per cent per annum, which appears slightly higher than what banks typically charge.

The company will also issue warrants to promoters who will pump in Rs 173 crore. The convertible warrants will give promoters a 3-per cent stake post conversion and help them maintain their current shareholding at around 34 per cent.

The need for raising funds through the equity route, in spite of a low debt-equity ratio of 0.32 as on September 2009, seems to be on account of the fact that the company continues to report a loss at the consolidated level. Secondly, it requires capital to deploy in fast growing and long-gestation businesses.

These equity investments totalling Rs 711 crore, coupled with the treasury corpus of about Rs 500 crore, will help the company fund its life insurance (Max New York Life, MNYL), health insurance (Max Bupa), healthcare (Max Healthcare) and packaging businesses (Max Speciality Films) over the next two years. While half of the total funds will be used for fund expansion of MNYL business, Rs 200 crore and Rs 150 crore will be used in expanding the operations of health insurance and healthcare, respectively.

While the life insurance business (85 per cent of operating revenues) is on a firm ground, with a healthy new business achieved profit (NBAP) of 21 per cent, persistency ratio (policy continuation) and above average solvency ratios, its operating expense ratio at 42 per cent is the highest in the industry. This is unlikely to come down in the near future as the company continues to expand the business. It is the expenditure on account of expansion in the life insurance business that losses jumped five-fold to Rs 333 crore in 2008-09.

In the healthcare business, the company, which at present has a capacity of 770 beds, is planning to triple its capacity over the next six years. The company also plans to double its packaging capacity to about 50,000 TPA by the end of FY11.

Considering that most of the new funds will be used in life and health insurance, profits are still some time away.

While the deal with Goldman values Max India at $1.22 billion (Rs 5,723 crore), analysts peg the sum-of-parts number between Rs 295-300 (about 90 per cent of this is due to MNYL), which translates to a return of over 28 per cent in a year’s time.