Max India unlocks value with stake sale in Max Bupa

Radhika Merwin BL Research Bureau | Updated on January 22, 2018

Deals have been plenty in the insurance space recently, thanks to the increase in the cap on foreign direct investment from 26 per cent to 49 per cent.

On Monday, Max India had announced a 23 per cent stake sale in Max Bupa — its health insurance business to its foreign joint venture partner Bupa Plc. With this sale, Max India’s holding in Max Bupa will come down to 51 per cent from the existing 74 per cent.

Max India’s stake sale in its health insurance business is one of the many deals that have taken place in the last year, thanks to the passage of the Insurance Bill. Like many conglomerates in the financial services space, this will help Max India unlock value in its insurance subsidiary by transferring shares in favour of its foreign partner.

Unlocking value

Insurance subsidiaries of companies in the financial services space have been undervalued, for two main reasons. One, until recently only few insurance players were profitable. The second reason has been the lack of investor interest in the space due to absence of valuation benchmarks in the listed space.

But now many players both in the life and general insurance space have turned profitable. The increase in FDI limit in insurance has now paved the way for unlocking value in insurance subsidiaries by opening up avenues for listing or transferring shares in favour of their foreign partner.

Also for players such as Max India, the value unlocking will be substantial. This is because the proportion of the contribution of the insurance business to the company’s overall business is substantial.

For instance more than 80 per cent of Max India’s value (sum-of-the-parts) valuation comes from its insurance businesses. Other banking stocks such as SBI, HDFC and ICICI Bank derive a lesser share from their insurance businesses -- about 8 per cent to 14 per cent of their SOTP value.

Max Bupa is one of the four standalone health insurers in the country. Given the increasing medical costs and growing awareness of medical insurance products, this market is expected to grow at a healthy pace in the coming years. The gross written premium for Max Bupa grew 33 per cent in the first half of this fiscal.

Deal consideration

In the general insurance space, the implied valuation of the companies are at about 14-16 times their estimated one-year forward earnings or at 1-1.5 times their one-year forward gross written premium.

Max India’s 23 per cent stake sale will fetch Rs 191 crore and values the health insurance business at Rs 830 crore. This is close to 1.5-1.9 times its one-year forward gross written premium.

Recently, Sundaram Finance has acquired an additional 26 per cent stake in Royal Sundaram, its non-life insurance joint venture with RSA Group, UK. The deal pegged the enterprise value of the insurance business at about Rs 1,800 crore, which was about 1.1 times Royal Sundaram’s current year gross written premium.

Recent deals

ICICI Bank has recently approved the sale of the bank’s 6 per cent stake in ICICI Prudential Life Insurance Company — 4 per cent to Premji Invest & its affiliates and 2 per cent to Compassvale Investments Pte Ltd, an indirectly wholly-owned subsidiary of the Singapore-based investment company, Temasek.

After the stake sale, ICICI Bank will hold about 68 per cent share in the life insurance company, while its joint venture partner, Prudential Plc, will continue to hold 26 per cent stake.

Less than a month before this deal, ICICI Bank had approved the sale of 9 per cent stake in ICICI Lombard to its joint venture partner Fairfax Financial Holdings.

Earlier this year, State Bank of India — India’s largest lender— had decided to dilute its stake in both life and general insurance businesses.

The bank’s executive committee had authorised divestment of its stake in SBI Life Insurance by up to 10 per cent and had also decided to dilute its stake in SBI General Insurance from 74 per cent to 51 per cent in favour of its foreign partner Insurance Australia Group (IAG).

ICICI Bank’s stake sale in the general insurance business valued the insurance company at ₹17,225 crore. At 64 per cent holding, this is about 7 per cent of the bank’s current market capitalisation.

Demerger plans

Earlier this year, Max India’s board approved the corporate restructuring plan of demerging the company into three companies, each of which will get listed once the demerger is complete.

With this, Max Life, the company’s life insurance business in which Max India holds 72 per cent stake, will be the first life insurance company in the country to get listed as Max Financial Services (MFS).

The second company, Max India, will have Max Healthcare, Max Bupa Health Insurance and Antara Senior Living. The third entity will be Max Ventures which will be the investment arm of Max Speciality Films.

Published on November 24, 2015

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