Friday, August 20, 2010

Investment Idea Max India Ltd

Bullish on the insurance sector, Max India in particular

India Population: Over 1 billion
Economy: Fourth largest in the world in terms of purchasing power parity (PPP)
GDP growth Rate: Over 6% per year on an average for the last decade
Savings Rate: Around 26% of GDP estimated middle class
Insured population: Only 20% of the insurable population is covered.

The rationale for being bullish on insurance companies is that the huge untapped market in India which is evident from the above statistics.

Listed stocks in the Indian market that have an insurance play:
ICICI Bank, Reliance Capital, HDFC Bank, Bajaj Finserv, Aditya Birla Nuvo, and Max India.

Of these, Max India is much more of an insurance play than any other company as the other listed companies have more of non-insurance business in their structure than insurance. In case of Bajaj Finserv, it has an agreement with Allianz of selling shares at a pre-settled price thus capping the upside of the stock.

Max India Ltd is the holding company of Max New York Life, Max healthcare, Max Neeman Medical International, Max speciality films, and Max Bupa Health Insurance. Since insurance is a capital intensive business, most of the private players are in red as of now but are expected to make profits from next year and that is when the IPOs of the insurance companies are expected to hit the market (FY 2011-2012).

Why Max India Ltd.
1. I believe that the bancassurance tie-up with Axis Bank is a positive development for Max India from a strategic point of view and will boost the annual premium earning (APE) growth and market share of MNYL going ahead (till date Max was solely dependent on agents for their business).
2. Max India promoter Analjit Singh plans to consolidate his holding in the insurance and healthcare firm by buying up to 5% this year through the creeping acquisition route. Promoters have already acquired 1.7% stake from the open market through a family-owned firm Maxopp Investments and plans to buy another 3.3%. Indian market laws restrict promoters from increasing their stake through creeping acquisition to 5% a year without having to make an open offer to the public. This shows the amount of confidence the promoter has on his business and the promoters know the health of their business more than anybody else.
3. Although the index is nearing its life time high, Max is near its 52 weeks low as there is no immediate positive for the stock, it is not in the radar of the operators and HNIs.
4. Max healthcare is on an expansion route and is in the process of starting greenfield hospitals in Mohali and Bathinda (Bathinda is an untapped market as far as 5 star hospitals are concerned although the purchasing power is on the higher side). Max healthcare is also going to benefit from the medical tourism that India is attracting as its facilities are world class. Finally, listing of this subsidiary will further unlock value).
5. Proven and respected management team lead by Mr. Analjit Singh.

The insurance sector is suffering from some minor hiccups at the current time due to the ULIP controversy and the new guidelines from IRDA for ULIP products and pension products, but going forward although the new fee structure will bring down the profit margins but the volume growth will more than compensate this.

Ambuja cements recently sold its entire 11.5% share of ING Life Vysya at around 190 crore (ING Life Vysya is a relatively small player when compared with MNYL). If this valuation along with the share price of Fortis/Apollo Hospitals (although Max healthcare is very small compared to Fortis and Apollo) are any indication then Max Ltd has more than 100% upside (timeframe 2-3 years) from the current closing price of Rs. 152.25 on August 20, 2010.

This bit of information might give you a little bit more insight on the potential that the insurance companies have.

Warren Buffett is the third richest man in the world is known by one and all; however, many of us attribute his wealth due to the stock picks he has made over the years which have turned multi bagger for him.

Although there is no doubt that Warren Buffett is one of the most gifted person in this world as far as stock picking ability is concerned, it is interesting to note that the $47 billion fortune is not only due to the fact that the stocks and bonds he bought over the years have risen in value but the majority of Warren Buffett's $47 plus billion dollar fortune is derived from his holding in Berkshire Hathaway (a company that he owns). Warren Buffett has transformed Berkshire Hathaway into a thriving conglomerate (from a textile company which he had bought) with a substantial interest in the insurance industry. The share price of Berkshire Hathaway have risen dramatically over time, largely as a result of Warren Buffett's ability to successfully invest the vast sums of money generated by the insurance companies that Berkshire Hathaway owns and also because of the trust and the name Warren Buffett enjoys among the investing community.

Disclaimer: I have a small investment in Max India (both in the stock and an insurance policy)