>Max India’s proposed deal with Mitsui Sumitomo Insurance (MSI)

MSI deal at significant premium to current fair value estimate. Max India’s proposed deal with Mitsui Sumitomo Insurance (MSI) values MYNL at 4.7X invested capital, likely the highest benchmark in recent times. This is almost at a 50% premium to our valuation estimate for the life insurance business (Rs69 bn). Capital gains from the deal will likely add Rs24/share (12% of the current market price). After this deal, based on recent transactions of the hospitals business and our valuation of MYNL, we estimate the fair value of Max India at about Rs238/share.


Sumitomo to replace NY Life in life insurance business
Max India has announced that Mitsui Sumitomo Insurance (MSI) proposes to acquire 26% stake in Max New York Life Insurance (MNYL). MSI will acquire 16.6% from New York Life and 9.4% from Max India. NY Life will exit the business and Max India will buy residual 9.4% stake from NY Life at Rs1.9 bn (close to book value). Thus, Max India’s stake in the business remains unchanged. Implied valuation high


The deal (Max India with MSI) implies a valuation of Rs105 bn for the life insurance business. This compares with Rs69 bn value of the insurance business, which works out to 3.2X FY2011 EV. Max reported APE of Rs12.6 bn over April2011-February 2012, down 17% yoy (against 27% decline reported by the private sector). Assuming NBAP margin of 11%, the valuation implies 1X EV+45X NBV FY2012E. We value Max NY Life at Rs69 bn, which is 1XEV + 17.6X NBV (assuming 10.5% NBAP margins).


The recent deal between Reliance Life with Nippon Life values their insurance business at about Rs120 bn, or about 4X the invested capital.


Deal adds Rs24/share
MSI would acquire 9.4% stake from Max India at Rs9.8 bn against book value of about Rs2 bn.
On a post-tax basis, these capital gains will add Rs24/share per share for Max India.



Valuation of Max India
While we don’t have coverage on Max India, we use recent deal benchmarks for the hospitals business to arrive at its fair value.


Scenario 1: Valuation estimate of Rs238/share
In this scenario, the businesses is valued as follows


1. Life insurance at Rs69 bn – KIE estimate
2. Capital gains of Rs24/share from the proposed deal
3. Max Bupa at Rs8/share – book value
4. Max Healthcare at Rs32/share – based on deal with Warburg. If we use the benchmark of deal with Life Healthcare Group- fair value estimate increases by Rs20/share; fair value estimate increases to Rs258/share in this case.
5. We do not cover Max Healthcare and Max Bupa


Scenario 2: Valuation estimate of Rs340/share
In this scenario, the businesses is valued as follows
1. Life insurance at Rs105 bn – benchmark of this deal
2. Capital gains of Rs24/share from the proposed deal
3. Max Bupa at Rs8/share – book value
4. Max Healthcare at Rs52/share – based on deal with Life Healthcare Group. If we use the benchmark of deal with Warburg, fair value estimate falls by Rs20/share; fair value estimate increases to Rs320/share in this case.
5. We do not cover Max Healthcare and Max Bupa

RISH TRADER