Path To Riches

Over the last six months shareholders of Max India have reaped a bonanza. In this period the Max India scrip had appreciated more than four times form a low of Rs 217 on December 10, 1999 to a high of Rs 878 on March 8, 2000. Capital appreciation apart, the company declared two interim dividends of 250 per cent and 37.5 per cent. And to top it all, a 1:1 bonus was declared by the company early this year. Does it mean that the kitty is empty for some time? No, there is more in store for investors who are willing to back the company. Let us take a look.

 

Max India started as a bulk pharmaceuticals company but gradually diversified into telecom, electronic components and specialty plastics. In 1998, Max engaged the services of McKinsey & Co to identify areas for future investment. Based on the recommendations of McKinsey, Max restructured its business and divested from its non-core areas. McKinsey also identified three new business areas_ insurance, health care and information technology_for future investment.

Meanwhile, to raise resources for and to focus on some segments, Max sold a 40 per cent stake in Hutchison Max Telecom for Rs 549.5 crore. This stake in Hutchison Max was originally held by Max Telecom Ventures, a 100 per cent subsidiary of Max India. This subsidiary was subsequently merged with Max India with effect From July 1, 1999 which resulted in inflow of substantial cash into the company. It is this infusion of funds into the company that would be used for expansion into insurance, healthcare and information technology.

Insurance

The insurance foray of Max has taken off with the signing of a joint venture agreement with New York Life Insurance Company, a Fortune 100 company and largest provider of 'new' life insurance coverage in America, to form Max New York Life in November last year. Max will hold 74 per cent of the Rs 100 crore equity of the company with balance 26 per cent being held by New York Life. The venture, involving an outlay of Rs 200 crore, would leverage the expertise of New York Life to provide life insurance products.

The venture would bid for a licence to enter the Indian life insurance sector as and when the regulatory authority initiates bidding process. And to make early inroads, the joint venture would look to differentiate itself from other players by delivering innovative products and services at competitive prices. The distribution of these products would be through agents working exclusively for the company. The company hopes to start operations within six months of obtaining licence.

Information Technology

The much talked of entry of Max into the information technology sector was made through a stake acquisition in two US based software companies_AltaCast L.L.C and MindCrossing Inc.

It has invested $ 7 million in AltaCast for a 22 per cent stake and $ 4 million in MindCrossing for a 15 per cent stake. The acquisitions have been made with the objective of being a niche player in the healthcare software and web enabled financial services market. The company is also looking at IT enabled services and at being an IT incubator. Hence, more acquisitions of information technology companies cannot be ruled out.

AltaCast, a information solutions company, has a 100 per cent subsidiary HealthCast which is an advanced healthcare

solutions company targeted at improving access to critical patients care. The

products of HealthCast bring complex legacy systems to user friendly desk tops and allow web enabled access that

facilitates sharing of knowledge within the enterprise and on the net. This product has been successfully been implemented in two hospital chain and more importantly

can address the needs of 1,200 more US hospitals.

MindCrossing is an infrastructOure and content provider that enables and facilitates B2B e-commerce decisions. It has a collection of interesting enabling mechanism like MindStores, MindStreaming and MindCircles. Each of these mechanisms value add to B2B e-commerce decisions by providing expertise and sharing of knowledge with similar communities.

Max has also invested another $ 3 million to set up Max MindCrossing India Limited, a 51:49 joint venture between Max and MindCrossing. The joint venture would setup a software centre in Delhi to develop software solutions and web enabled services. The company would also develop software solutions for new business of AltaCast and MindCrossing.

Healthcare

After much deliberation Max has decided upon a healthcare delivery system

that is totally different from that of any

other corporate healthcare entity. As opposed to a single hospital, the company would establish a three tier network of healthcare centres. At the base level

there would be primary health centers that would be open 24 hours a day seven

days a week. These centres would provide initial diagnosis and treatment. In case of ailment requiring a more advanced

investigation the case would be passed on to the better equipped secondary hospitals that would have specialists for further investigation. At the top would be a full-fledged hospital that would meet

advance healthcare needs. Thus, the primary centres would not only provide treatment but also act as referral centres for the secondary level centres and eventually for the hospital.

The company would initially start in Delhi with a chain of 50 primary health

centres, 5 secondary centres and a maximum of three hospitals. It is still not

decided on the number of hospitals it would have but a total of 500 beds id decided on. To provide expertise for setting up this chain Max has signed an agreement to ally

with Harvard Medical International. Harvard Medical would not only help with design and implementation but would

also help with continuing medical education of doctors, training of nurses and quality control. The chain would also benefit from co-branding of clinics as Harvard Medical affiliates.

Financials

For the nine month fiscal ended March 31, 2000, the company has reported a net profit of Rs 42.2 crore on a turnover of Rs 141.71 crore. The result is not comparable with result of previous fiscal as the last fiscal, ended June 1999, was of 14 month duration. Also, the amalgamation of Max Corporation with itself with effect from July 1, 1999 makes the comparision meaning less. But this amalgamation has boosted the reserves of the company to Rs 514.7 crore form Rs 178.76 crore last year.

The 1:1 bonus announced by the company has doubled the paid up equity capital of the company form Rs 11.53 crore to Rs 23.06 crore. The company has also got a nod from its shareholders for an Employee Stock Option Scheme to the extent of 5 per cent of the share capital of the company which would result in further dilution.

Valuation

For the nine month year ended March 2000 the annualized earning per share of the company, on its pre-bonus equity, was Rs 43.02. The company is in position to not only sustain it but better it in coming

years. But this is only icing on the cake.

The actual value of Max is hidden in its investments. Apart from the cash realised from the sale of its stake in Hutchison Max it still holds six per cent equity worth about Rs 125 crore in that company. It has five other joint ventures which even at a conservative par valuation would pull in another Rs 200 crore This way the company is sitting on cash and realizable investments of more than Rs 700 crore which itself translates into a book value of about Rs 350. What is even more significant is the fact that the company has made investments only after careful scrutiny despite sitting on cash for some time. Further, Max has a history of making its joint ventures work and then realise their value through disinvestment. Even in insurance, the foreign partner has the option of increasing its stake if the guidelines allow it. Which means that insurance stake could be diluted at a later stage. The stock is currently trading at Rs 233 ex-bonus. Investment can be made at declines, not only for steady returns from the healthcare foray but for occasional windfalls from sale of investments.