Max India,Max ventures and Analjit singh:Money,Velocity and Salvation

I see people analyzing a company…they try to extract the gold from financial data, numbers…investing all their efforts on the financial data as if the figures of turnover, profits are generated in auto mode by some business entity. But no such entity exists…behind all these superlative businesses, giant economies is just one factor-Human factor. The figures we try to use to judge the worthiness of a business are nothing but a quantification of human efforts….and bad news is that even this quantification can’t capture the force behind human efforts-wisdom. It counts the money but leaves the velocity....human spirit, creativity and bravery is the Velocity. Total money in an economy is a function of base money multiplied by velocity of money.

Any central bank can increase the base money but still it does not ensure that this will increase the liquidity in any economy. The best example for the same is the massive quantitative easing by the US Fed where it raised the money base from some $ 900 billion in 2008 to $ 4 trillion in 2014 but still it could not impact anything-neither inflation rate as was feared but nor the consumption (and GDP)  as was expected because if money base was increased 4 times velocity of money came down to 4 from 17 (factor of 4). That’s why it is so difficult to channelize any economy in the desired direction. Due to uncontrolled factors like this we still do not have any universal growth formula just like E=MC².

Economists still can’t foresee how the velocity of money will change. There is no trend analysis possible because past experiences do not provide any such trends relative to supply of base money.  Money is a powerful tool in directing any economy but only when money velocity is stable. So the most important tool in the hands of central bank is hampered by the inability to measure the velocity factor and same thing is true for stock analysis. We try to use the best possible fundamental analysis tools to judge the validity and value of a stock…but still these tools are ineffective in valuing the force behind all performance indicators which is the-Human factor.

Also, sometimes I feel that economists can’t measure or judge this Velocity (V) because in the money equation (M*V=P*T or GDP) except V all other factors are independent of each other-Money base is an individual independent entity, so is Price level and volume of transactions. But here V is just an expression expressing the use of money (in fact, decision to use money) by general public...means V does not direct or establish anything because it is not an independent entity. Velocity does not direct the prices of goods but individual choices of demand and supply. More on this some other time. But in driving the performance of a company the velocity of the human factor is indeed independent of all other variables and that’s why this is so important.

So in most of the cases, I have found that we can focus on human being alone and we can find the gems. I have found some of my best picks by just valuing the human factor behind the company-Kiran Mazumdar shaw (Biocon), Vikas Oberoi (Oberoi Realty), Ajay Piramal (Piramal Enterprises), Analjit singh (Max Group), PRS Oberoi (EIH Hotel) and from current big bets Dr. Devi shetty (Narayana Hrudayalaya).

Today I am focusing again on Mr. Analjit singh who in my view has fantastic eye for gauging the next big thing in the business. He was one of the first to enter mobile telephony in India through his joint venture with Hutchison and made 561 cr by selling his stake to enter Life Insurance and created very strong brand image of Max New York life insurance among the big names in insurance sector backed by giant business houses like ICICI and HDFC and Reliance. Max New York life insurance is one of the most ethical having lowest agent turnover and highest agent productivity. Then he selected healthcare as the next focus area and started Max Healthcare which established itself quite fast. He singlehandedly created an empire of Rs. 15000 cr. But this eye for opportunity is not the real worthiness of Analjit singh.

A) Analjit singh means trust, ethics and wisdom

 He is one of the few in Indian business who has maintained and followed very high corporate governance and ethical standards. World renowned management Guru Ram Charan is his close friend. With his guidance, Analjit  singh transferred all his holding in Max group into Trusts. He wants Max to be a professionally managed company not promoter governed. He has kept management separate from ownership. His children had to work from scratch in Max to earn their place. He is so much obsessed with ethical management that if 4 out of 5 trustees vote against him then even he can’t move ahead with his action.

Max has one of India’s strongest Board and best independent directors. The Board has immense powers and no investor dares to challenge or force them to be yes men. I have never seen such a strong and high caliber board in any group as each board member is an institution in itself with highest regard for ethics and transparency. Some people find it hard to understand Analjit Singh’s obsession with governance and ethical standards and his decision to stay away from day-to-day management. But he has seen and bore the brunt of mismanagement in his family. Analjit singh is the son of Late Bhai Mohan singh the founder of Ranbaxy. In the family settlement of assets-His elder brother Parvinder singh who was close to Bhai Mohan singh got the  prized possession of Ranbaxy, Real estate went to brother Bhai Manjeet singh and Analjit singh got a small troubled textile factory at Okhla.

Analjit singh with Ram Charan

(Source: Forbes India)

Ram charan regards Analjit singh as one of his best students with great eye for details. Ram charan is a world renowned Management Guru, best-selling author. He advises to who’s who of global giants like GE, BOA, Dupont, Tata. He works alone and shaped a number of global CEO’s like current CEO of GE. GE is working with him for last 45 years. They say that nobody knows Corporate America better than Ram Charan. Ram Charan is the common link between the promoter, board and the senior management of Max India. He attends board meeting of Max once a year and give his guidance. Ram charan guides three children of Analjit singh in their individual businesses. Analjit singh regards Ram Charan central to strategy, people and ethics at Max group. Presence of person like Ram Charan is the best indication of Corp governance standards of the group.

Also, now is the time when cases of fraud, mismanagement, money leakage are coming out daily and it is shocking to see big names in the list. So here, a group like max with very strong ethical management and board has immense value. A company never commits a fraud...it is always the human factor that's why human is the most important factor in judging and evaluating a company.

I am a great fan of this man Analjit singh and learned quite a bit by following him. However, there are some people who think that he is a mercenary as he starts a business with great devotion but then when he gets a fair value he sells the same without any emotion whether it was Hutch, Life insurance (tried to merge with HDFC), Healthcare, health insurance. But I think all these transactions were prudent business decisions taken with a focus on protecting and growing shareholders. And decision to quit these businesses was primarily motivated by a new much better business opportunity in his eyes. His prime motive is earning profit and maintaining business viability not to create and maintain a legacy business. So whenever he sees that dynamics of their line of business are changing due to rising competition and requirement of high capital he understands that now is the time to change track. On the contrary, it is very challenging, difficult and discomforting to start a new business with great dedication again and again and i think this alone proves the risk taking ability and mettle of Analjit singh to succeed in tough environment.

But this change of track is never abrupt…new track is always laid beforehand. It is not that they start laying a fresh track only after taking the decision to change the track. Like when his life insurance business was generating profits he started healthcare business. But apart from business angle, I think there may be another reason that we see Analjit singh selling these businesses time and again-he does not feel belonged or related to these businesses. His inner being wants to demonstrate creativity, innovation on some other canvas.

Then, few years back, one day I read something about his new investment. He went to Africa to watch football world cup in 2010 and he just fell in love with the place-the Franschhoek winelands of Cape Town, the world-renowned wine-producing town.  He felt a sense of connection with that place and then started his string of investments in the real estate of Africa.

And I knew at once that Analjit singh has found his path to salvation-Real estate. And I am buying Max venture since then along with Max India. Earlier I earned 7 time return in erstwhile Max India (Before Demerger).

B) Real estate-Next big thing for Analjit singh

I think the moment he understood that he yearns for this business…that he wanted to use his creativity in this business he must have made his mind to exit his complex set of businesses of healthcare and insurance. People say that he wanted to quit as both especially healthcare needs high capital investment amid tight regulatory framework but I think he does not love the healthcare just like our Dr. Devi shetty who feels healthcare like his breath…like our PRS Oberoi who loves creating masterpieces through his hotels. Analjit singh was a close confidant of PRS Oberoi and was about to acquire a significant stake in EIH hotels to thwart the hostile takeover threat of ITC which holds a 15% stake in EIH hotels but his investment in EIH was strongly objected by Vikram oberoi and Arjun oberoi,  son and nephew of PRS oberoi.

Later on Reliance picked 15% stake in EIH (along with buying Analjit singh’s stake…some 5%). Although ITC always maintained that it’ll never go for hostile take-over of EIH…quite contrary of what L&T has just done to Mindtree. I think the recent hostile takeover of MIndtree by L&T is a black day for Indian corporate world. Mindtree was a stunning company and one of the most ethical, employee and shareholder friendly. Its promoters are one of the most passionate and visionary. On the contrary L&T is anything but ethical with accusations of forgery (by world bank), bribing and money laundering. When I was searching one name in Indian IT which can do big in Artificial Intelligence then Mindtree was the name I finalized and was planning for investing in it but takeover by L&T was a big blow for my plans also and I have dropped any plans of investing in it as of now.

Coming back to Analjit singh’s love for Africa-ever since he has felt the connection with the picturesque village of south Africa, he has invested some 300-400 cr in his personal capacity in south African real estate. Singh purchased 68 hectares of farmland with vineyards, olive trees, plum trees and pomegranate fields in Franschhoek valley in South Africa. Singh has 17 land holdings and substantial hectarage under wine cultivation.

He set up Leeu Collection, an international collection of four boutique hotels, restaurants, a spa, a microbrewery, and home to Mullineux & Leeu Family Wines.

Singh told Forbes Africa “Business is one part of my life but the person is more permanent and more holistic in a manner of speaking. So when I think of myself as a person and my likes and dislikes, and I don’t have many dislikes, what I like most are all the things this life embodies. This place gives me greenery, nature, mountains, fog, and science and technology, as wine-making is all about technology [with regard to] the maturation process, and the way the fruit is extracted. These are the things I like. I don’t like sitting in front of a computer screen trying to trade off the New York Stock Exchange. It’s not my cup of tea. I have therefore really begun to think of this lifestyle, even though my days are busy when I come here. But whilst you may call it work, for me, it’s the most pleasurable thing to do… I am in the moment when I am here. It’s the most restful state for the mind. I feed off natural energy.”

Local village people treat him like one of them now and he is a very famous person especially because people see in him the prospectus of job growth. In Franschhoek valley, he has one special figure as his neighbour- Sir Richard Branson founder of Virgin group is investing big in the valley due to superior wine making capability of the valley. The great mountains, pure and clean air and vast tourism potential has made the valley one of the biggest investment destination. Not a surprise that Analjit singh has seen the opportunity much earlier. These days he spends three months every year in his African properties.

He has also bought properties in Italy and London (Linthwaite House, a boutique luxury hotel at Windermere) and has around 68 key properties around the world including India. Recently, he has acquired a bungalow owned by his nephews Malvinder and Shivinder Singh for Rs 185 crore in Lutyens’ Delhi which is the most expensive real estate zone in Delhi. In acquiring all this, he has invested significant money of its own apart from incurring debt of some Rs. 2000 cr. Recently he is in talks with KKR to raise 2000 cr for reducing debt. The deal with KKR is going to have equity portion also.

Earlier in 2014, Analjit singh tried to buy a stake in Nashik based Nashik Vintners, the makers of Sula wines only to be pipped by Anil Ambani. I do not know the status of investment of Anil ambani.

As per latest estimates the property prices in the Franschhoek valley has increased by some 150% in last 5 years and so are the prices of properties of Analjit singh.

So I see that this is going to be one of his biggest and passionate venture and something which has the capability to engage him permanently. And this is where Analjit singh is seeking his salvation after wandering and covering the distance.

But as it has happened all the time, I think market has failed itself in understanding and valuing Analjit singh. However in difficult times, one would always prefer man of wisdom like Analjit singh. I do not know what is going in the mind of Mr. Market as I am trying to guess the next step of Analjit singh and in the process regularly buying the stocks of Max India and Max Ventures.

Healthcare business of Max India is another factor apart from real estate business which has great growth prospectus and something which is my favorite as I see healthcare to achieve the status of IT industry for india in few years’ time.

C) Why Real Estate for Analjit singh

Real estate is not just like any other business…it has some unique features which require specific approach to understand the dynamics of real estate.

1. Quite opposite to what most people think real estate is very regional. There is nothing like pan India market for real estate. Every market is unique with its own set of supply demand dynamics. It is just like when people say that the world temperature is rising at the earth when the matter of the fact is there is no such thing as world temperature. Every place on this earth has different temperature which goes on changing everyday all the time. So what they do is to calculate the average of all these worldwide temperature to conclude that temperature is rising. But I have serious doubts whether we can take this average as a representative of global temperature to conclude and prove things.

Similarly there is no such thing as Indian real estate. If I want/need to buy a property in Chandigarh but then I won’t be buying a property in Surat if same is available cheaper. If I need to buy in Chandigarh then I’ll go for chandigarh only. And due to this demand supply dynamics of Chandigarh are more important because every place has specific factors which affect the elasticity of supply of real estate.

Like, I am always of the view that Mumbai market may not follow the trend of fall in the prices of real estate in NCR, Bangalore etc. One of the main reason for this is Mumbai has relatively inelastic market as far as supply is concerned and the reason is-Mumbai is land locked from 3 sides by sea so we can expand the city only by that much. But there is no such limitation for the city like Bangalore which can expand in all the directions. Also Mumbai municipality is on the verge of raising the Floor space index (FSI) in the city which will further increase the supply of space for more real estate development from sane piece of land. Due to this, I have been investing in Oberoi Realty for last 3-4 years from 200 levels but invested quite a bit last year when it fell to 350 levels. Apart from these Mumbai factors, Oberoi realty is one of the most ethical and premium builder in Mumbai with one of the strongest balance sheet. In my real estate stock portfolio, Oberoi Realty is the biggest investment followed by Mahindra Life space.

Most of the manufacturing and business activity of the country is restricted to some 10-15 large cities like Delhi, Mumbai, Bangalore, Hyderabad, Chennai or pune. That’s why regional factors become more and more important. Normal Tier 2 or Tier 3 cities do not have any real demand for real estate.

2. Then there is commercial real estate which has its own set of impact factors which are quite different from residential real estate. Demand for commercial real estate is more stable than residential. As more and more global companies and manufacturing is entering in India the need for Tier 1 office space is growing fast. And I have a feeling that as compared to residential, commercial real estate is fairly priced and less chance of a bubble. The reason is- rental yield. Rental yield on residential real estate is just 2%-3% in India while the same for commercial real estate is in the range of 8%-12% which looks authentic. This much higher yield is the proof that demand for commercial real estate is real and based on the natural economics of demand and supply rather than speculative demand for residential real estate where the customers are not much aware of the steep prices. People invest in residential property out of baseless speculative instincts and then they keep it forever in the hope of getting 100%-200% gain and due to higher prices and low demand the rentals are low in the vicinity of 2%.

Due to this higher and much real yield, foreign investors are investing big time in Indian commercial real estate. The likes of GIC, Blackstone Group, Canada Pension Plan Investment Board and Brookfield Asset Management etc. have invested big in Indian commercial real estate. GDP growth is still good in India and this will create the demand for more commercial real estate. Another factor which I think behind the higher demand for commercial space is due to much higher investments in residential segment in the last decade or so and this has sort of created a supply constraint in the commercial space and all of a sudden people have realized the much higher yield of commercial assets.

In 2018 around 50 million sq. ft. of commercial space was leased out which is the highest in last 8 years with major contributions from NCR and Bangalore. Few days back some of my friends opined in favor of a friend who bought a flat at expensive price (in my view, some 70-80 lacs for 1100-1200 Sq feet) and they submitted that this is better than stock market investment. But I told them that the rental value of the flat is Rs.15000 pm (1.8 lac a year) which is around 2% yield and this is the yield (dividend) I am currently getting from my investments in stocks and this is going to grow much faster as most of the recent investments made at very low prices in high dividend stocks are yet to accrue dividends. On the contrary, he bought the flat at the peak prices and chance of further growth in residential flat prices is very remote. So by paying Rs. 30 lac upfront and taking a loan of Rs. 40-50 lac for next 20-25 years my friend is just saving 2% rental yield which he could have earned by keeping his 30 lac in bank.

In my view most of the just concluded bull run in residential property market was created by investors (black money) buying real estate for further selling (or renting?) not by end users. I do not think that normal end users in India have so much money to buy such expensive but ordinary houses. Low rental yield of 2% dwarfed by bank interest of 8-9% on loans discourages investment in residential property for earning rent. So focus was always on capital appreciation which did happen but money circulated in a narrow loop and no real demand was created.

Now as our economy needs new sectors to push the GDP growth, I think time has come to have a revisit of real estate sector and in order to promote authentic and real investment we need low interest rates and most importantly government should reduce the tax rates on long term and short term capital gain. Also, there is urgent need to cut stamp duty and registration charges as these are very high (6%-10%). Stamp duty charges in china are .05%, in Brazil and USA around 2%. Cutting stamp duty will not lower the revenue of the state as people will declare real deal price (now 50% of deal price) and there will be volume growth and curbing of black money.

Growth in commercial real estate also results in creating demand for residential properties as employees move to new business places and require homes.

Apart from Max, in commercial real estate i have so far invested in Mahindra Lifespace and Prozone Intu which have high share of lease rentals in their overall revenue. Mahindra Lifespace was the first one to introduce integrated cities in India and created gigantic integrated cities in Chennai world city and Jaipur world city spanning 1500 acre and 2900 acre respectively. Prozone earns some 100 cr a year as lease rent but its market cap is just 300 cr with fully paid land bank of around 2000 cr with almost nil debt. Oberoi Realty's commercial real estate business is smaller as compared to residential portfolio but he has invested big for this business and from its present commercial portfolio of some 1.6 million sq feet it is going to touch 4.2 msf in the near future.

3. Supporting Infrastructure: Recently, there is high growth in much needed supporting infrastructure in metro cities like Metro rail, Airports etc. This has resulted in growth in demand for commercial properties. Metro rail network has created the biggest impact and corporates are moving to these cities. Here, NCR region has the most robust and vast metro rail network which is way bigger than any other cities. It is the twelfth largest metro network in the world and it goes beyond connecting intra city and connects nearby cities like Noida, Gurugram, Faridabad and Ghaziabad. Most importantly, Max ventures has developed and is developing its commercial properties in NCR market.

4. RERA Impact and debt problems of the sector: strong regulation of RERA and tight liquidity position of the most of the small developers is forcing them to re-consider their approach and they are making deals with large corporates for completion and sale of the project. This is going to create great opportunities for strong corporate developers like Oberoi Realty, Godrej and Mahindra. Max group is also going to jump in as they have all the resources and strong brand image. In fact, their first completed commercial project Max Tower in Delhi 1 has been acquired from original developer 3C which ran into financial troubles.

NCR market has huge unsold inventory and Analjit singh himself has invested quite a bit in NCR market so I am sure with having the pulse of this market they are definitely going to pick such deals. Residential developers have some 4 lac cr debt as on date and they are required to pay around 1.2 lac cr every year including interest payments to the lenders. However their EBIDTA is around 60000 cr so they are in no case in a situation to pay back the money to lender with current situation. So I am sure we are going to see big stressed sale in the near future.

In fact, Max estates (Subsidiary of Max Ventures) is already in discussions to acquire land parcels in NCR for office projects in partnership with Apollo management Singapore ltd.

D) So where does Max groups stand now

1) Max ventures: Let me first come to Max ventures as it has just completed one of the marquee commercial project in NCR market.

a)Earlier it was mainly a packaging product player with investments in hospitality and E-commerce startups. Then as they planned for real estate foray and expansion of packaging business, they raised the capital for the same by stake sale of packaging business, right issue and investment by New York life.

So in all they collected Rs. 770 cr-200 cr from stake sale of 49% in packaging business to Japanese major Toppan, 450 cr through right issue (at Rs. 61 per share) and also earlier partner of Max in life insurance business New york Life picked 22.5% stake in max venture for Rs 121 cr (Rs 78 per share). Right issue was primarily for real estate business. After the right issue, promoter holding in the company has gone to 47% from 38%.

b) The repeated investments by the marquee global business houses and investors in Max are a testimony for the faith in managerial capability of the max group by these global giants. New york life acquired 26% stake in Max Life in 2001 which it sold to Mutsui Sumitomo in 2012. Earlier, KKR picked 10% stake in the life insurance business and now KKR is putting big money in acquiring majority stake in Max Healthcare. KKR has also supported the personal real estate business of Analjit singh by providing some 2000 cr credit line.

c) Apart from the above, they have also made partial exits from their investment made in e-commerce venture Nykaa. Max ventures invested 17.5 cr in 2016 for 2% stake. It sold 1% stake (around 17 cr) at 100% profit in FY-2018 and sold .5% in June-19 quarter for 25 cr. Max ventures holds 18.87% stake in Azure hospitality with investments of Rs. 70.5 cr. Azure is the owner of some of the fastest growing restaurant brands in india like Mamagoto and Rollmaal. Azure is backed by Goldman sachs which holds around 35% stake in it. Azure is debt free and profitable with topline of some 180 cr with 45 restaurants and 2300 employees. So this is not some generic restaurant business selling run of the mill chinese food, butter chicken and Dal makhani which opens and closes daily. Max has selected one of the best and successful names in Indian food space.

Max has earned 42 cr from 11-12 cr invested in Nykaa so far. For Azure, I do not have any valuation figure right now but the minimum valuation of Max’s stake should be around 100 cr. So we’ll see Max exiting these investments in due course of time in order to grow real estate business.

d) So far Max ventures has completed its first commercial development project Max tower in record 24 months in Delhi 1 which is located on the DND flyway between Delhi and Noida. After its original developer 3C ran into financial troubles, it was being executed by the private real estate arm of Analjit singh Piveta Estates Pvt. Ltd. But later on the same was transferred to Wise Zone Builders Pvt Ltd (Subsidiary of Max estates which is a subsidiary of Max Ventures for Real estate business). It is probably the only stressed real estate asset in North India to have witnessed such a speedy revival and completion.

Max tower is 22 story building with top 3 floors are for amenities like Auditorium, food courts, green areas, an air purifying system, Gym, swimming pool and spa etc. It is the only office building in Delhi NCR to have these facilities. No doubt, with this Max has changed the concept of office life from nothing else than boring all day tireless sitting to involving and refreshing work well philosophy. It has total leasable area of 5 lac sq feet.

e) Max tower is an “A” grade LEED certified commercial property built at a total cost of 600 cr out of which Rs. 150 cr is debt and 450 cr is own contribution. There is shortage of “A” grade office space in NCR and due to amenities being offered, Max tower is getting monthly lease rental of Rs 100 sq feet which are 40% higher than the neighborhood rents. So the rental yield is coming around 12% which speaks volume about the capability and eye for business opportunity of the management. Most players and foreign investors are happy at 8% yield so in this background this indeed is a commanding performance and I am expecting Max group with their fantastic eye for details and trends to establish strong brand image in Indian real estate market.

Global co-working giant IWG has taken on lease 50000 sq feet for its space brand. 20% of the leasable area has been taken on lease by Max group firms. French Bakery player L’Opera, well-known for bringing authentic French bakery products to India has opened its biggest outlet in Max Tower which was inaugurated by French Ambassador to India in June-2019.

Actually, they are not a novice in this sector as building of large hospitals require tireless planning for most efficient use of the premium space and providing and meeting the expectations of patients. So they already have the ground work for this business.

f) As shared earlier, due to financial troubles faced by developers strong hands like Max has the opportunity to grab land parcels, projects cheaply and for Delhi 1 projects most of the projects are facing insolvency proceedings and Max has already submitted bids for these projects.

g) Apart from Max Towers they are also developing a commercial project “Max House” in Okhla Delhi with leasable area of 1 lac sq feet in the first phase. Earlier they were having 50% interest in this project and the balance belongs to Max India ltd as Max India is the holding 85.17% stake in Pharmax corporation in which phase 1 of the Okhla project was housed. But in June-19 Pharmax corporation has sold its 85.17% stake to Max estates for 87 cr including preference share capital. With this I think now as Max Estate is holding 85.17% in the Pharmax corporation so their interest is also 85.17% of Phase 1 and further expansions. Pharmax is already earning lease rent income from the building.

A residential project at Rajpur Dehradun comprising 22 super luxury villas with a price tag of Rs 4-5 cr each has been completed and so far they have sold 11 units for 44 cr.

h) For their manufacturing business, they have almost doubled the capacity with recent expansion of around 250 cr. Last year was the difficult period for indian packaging firms due to over supply but this is normalized now and June-19 results were great for packaging business and I expect this business to result in good profits and cash flows.

i) I think of a situation in the future where Max needs cash to buy stressed real estate assets cheaply  then they may sell their 51% stake in packaging business. Although before that they would sell their investments in Azure. Also from now on they will get steady lease income from Max Tower which they can use for expansions.

j) So no doubt, Max ventures is going to create serious wealth in future and things have set up nicely for that. But its share price was falling along with market and after Mar-19 results I have started my second phase of investment in this one from Jun-19 onward. I started 2^nd round from 42 and goes on picking this one all the way to 38 just before jun-19 results. I was having strong feeling that its june results would be great which they were and after stellar June-19 results it has already shot up from 35 to 45. My earlier avg was around 62 but picked up good quantity in the current fall and the average now is 46.  

k) Let’s try to find out its minimum value. Last time they sold 49% stake in packaging unit for 200 cr so after the recent expansion (with debt) and growth in business they should get minimum 250 cr for their 51% stake at present. They have invested 450 cr in Max Tower project. They were having 120 cr in Mar-19 balance sheet out of which they have agreed to pay 87 cr for Pharmax acquisition but let’s take this 120 cr. Take the value of their Nykaa and Azure investments at 125 cr. The sale price of balance 11 flats in Rajpur at 4 cr per flat is 44 cr. So all this make the minimum valuation at 989 cr or 1000 cr when its current market capitalization is just 650 cr. Please keep in mind that we have only taken the minimum value of its various verticals. So this makes current market price of 45 a good entry point.

l) They have also setup Max Asset Services to take care of the servicing needs of their commercial assets. But it is not like our traditional facilities management entity to take care of tap and toilet. Its focus is on creating community in the building and creating events, sports and all that which will lead to a better customer experience. This is a novel idea which may create niche business opportunity in the future.

2) Max India: Market has literally thrown this one into garbage bin. Max India houses the heathcare (Max Healthcare), Heath insurance (Max Bupa) and senior living business (Antara senior living). Recently they have sold out their 51% stake in health insurance business for 515 cr and then sold out their stake in Pharmax corporation to max estates for 87 cr. So these two deals mean that they have 600 cr cash in the books.

a) In Antara senior living they have created one of the most premium senior living project with excellency in design and facilities named ‘Antara Purukul’ which is spread over 14 acres of lush greenery in Dehradun.. Senior living as a concept is growing fast in India and it is coming out of the negativity attached due to old age home thinking but this one is a premium hospitality project where old age residents live in best in class luxury homes which are designed around the safety, wellness and lifestyle requirements of seniors.

Senior living communities is popular in USA from 1980’s and we are trying to catch up now with the potential. Senior living is a $ 300 billion industry in USA. Other developers have opted to outsource the management of the community but Antara has decided to manage the entire community with an in-house staff trained by the company. And their top notch community service is winning accolades from around the world. I have seen disputes emerging in other senior living communities over frequent increase in dining charges etc. but residents of Antara are living and enjoying a great life. Residents are provided with dining facilities, daily housekeeping, laundry services, concierge services, Yoga, healthcare, Bar, sports activities and life time maintenance of everything in the house be it the flooring, plumbing, lighting or electrical appliances.

Images source: Antara senior living

But Antara is not our normal real estate project. Antara has been carefully crafted by internationally renowned architects Perkins Eastman from New York and Esteva & Esteva from Spain, with design execution support from Arcop Architecture Inc. and Studio Lotus. With construction partners such as Shapoorjii Pallonji, Suri & Suri Constructions (civil works), Vadhera Builders (finishing works), Sterling Wilson (plumbing and firefighting) and Jakson (electrical). While designing the homes, focus was on the fact that these are to be used by senior citizens where premium-ness should be supported by safety.

Antara was having the inventory of 192 apartments with price ranging from 2 cr to 6 cr. So far they have sold 111 apartments and 73 residents have moved in. They have collected around Rs.300 cr so far.

Antara is the brain child of Tara Singh Vachani, the youngest of Analjit Singh’s three children. Her husband, sahil Vachani, is having the charge of max ventures.  In order to understand the senior living model and finer details she has visited numerous senior living projects across countries and she has come out with a project which is at par with world’s best so far.

Now, Antara is focusing on growing its business via asset light, low risk business model where it will partner with developers for operating or joint development model. It is looking to leverage its strong brand name and execution skills. Antara’s responsibility will be to provide design, quality assurance, sales and marketing support, and program management during the project and sales phase and independently run the community operations after handing over the apartments to the residents. It has so far identified two such opportunities in Chandigarh and Noida. For Chandigarh project comprising 650 units with price range of 75 lac to 1.5 cr, developer will arrange land and debt whereas Antara will invest some 20cr and will get 17%of collections as fee. For Noida project comprising 550 units with price range of 75 lac to 1.5 cr, it will put 51 cr apart from guarantees for debt of 130 cr whereas developer will arrange land. Here it will get 10% of collections as fee and 62.5% of net realization.

So I think, this fee based co-development model will provide vast business opportunities and as the contribution of Antara will mostly be designing and marketing at development stage so the same will ensure execution of more projects at a given point of time resulting in more revenues for given amount of capital. Max India has invested around 283 cr in Antara so let’s take this as minimum valuation of Antara.

b) Max Healthcare: Max India has 49.7% stake in Max healthcare. South Africa based Life healthcare is also having 49.7% stake and they are selling the same to Radiant life care for Rs. 2136 cr (Rs. 80 per share) thus valuing the Max Healthcare at 4298 cr. Radiant is owned by Abhay Soi and backed by KKR. After that Radiant’s healthcare assets will be demerged into Max Healthcare which will result in KKR and Radiant promoter Abhay Soi together acquiring a majority stake in Max Healthcare and Max Healthcare will be listed separately. Max India shareholders holding 100 shares will get 99 shares of demerged Max healthcare and this means that current 1 share of Max india will get 1 share of Max healthcare valued at Rs. 80 at a valuation of 2136 cr. Combined valuation of Max Healthcare and Radiant life care will be around 7300 cr.

Max healthcare has revenues of some 2800 cr. Last 2 years were very difficult for the healthcare industry in India due to regulatory overhang where it was perceived that Hospitals are looting people with exorbitant pricing. However this is not true as hospitals are very capital intensive business and require large capital due to high real estate cost of setting up hospitals in prime locations and high cost of imported machinery. Contrary to the general public opinion, Hospitals have low return on equity of some 8%. So industry suffered in last two years due to control over pricing. Hospitals do not mention the charge for machinery, building etc. in their bills so it appears that they are charging way too much for drugs and consumables. But then they corrected their billing composition and to counter the price control over drugs they raised the procedure prices.

Now the industry is back to the growth in bottom line and the likes of Apollo and Narayana Healthcare have given stellar performances. Max Healthcare has also shown a Net profit of 20 cr in Mar-19 quarter. Healthcare industry is going to witness high growth from hereon. India is leading the world in low cost quality healthcare and this is going to be once in a life time opportunity for India to improve its infrastructure and support to encourage the growth of medical tourism which I think has the potential to achieve the scale achieved by our IT industry. Healthcare is still a luxury and around 90% global population can’t afford this. But India is now leading the way in changing the notion that healthcare is costly. The likes of Narayana are providing heart surgeries at the cost of Rs. 2-3 lac when the same is costing around 70-80 lacs in USA. Healthcare is the top priority of Modi Government also so in my view healthcare stocks are stunning high growth but defensive bet for any portfolio.

I have invested most of my money this year into healthcare stocks and the likes of Narayana Healthcare, HCG and Max India are my top investments and I feel NH is going to be the stock of this year.

After the demerger of Max Healthcare (merging Radiant life care), Abhay soi is going to lead the company. In the resultant MHIL, KKR will be the majority shareholder with 51.9% stake, Abhay Soi will hold 23.2%, Analjit singh will hold 7% and public will hold 17.8%. Radiant life care has the management contract for running BLK hospital, Delhi (650 beds) and Nanavati hospitals Mumbai (350 beds). Before Abhay Soi took the operations of both these hospitals, both were having stagnant topline and losses. But after Abhay Soi, BLK revenues has grown at CAGR of 43% from FY10 - FY18 and 27% in Nanavati from FY15 - FY18. During the period EBIDTA growth in BLK is 48% while in Nanavati EBIDTA margins in FY 2018 are 2.7% against losses in FY 2015 when Abhay soi took the control.

This Abhay soi is a very dangerous man and he is the reason I am very excited about the growth of Max healthcare in the future. This is also due to the fact that after the merger, there will be the positive impact of synergy as both these chains have major business from Delhi market and so they will witness savings in costs like HR, IT, Finance function, common and bulk sourcing of drugs, machinery and consumables. So I think even these changes alone will bring significant positive impact on the bottom line. And most of the impact will come from the superior management skill of Abhay Soi and financial clout of KKR.

So I think investment in Max India now is a fantastic chance to be a part of high caliber business lead by the likes of Abhay Soi and KKR and due to market imperfection the same is not available even at par value but at throw away price.

Before starting Radiant life care, the first firm in India in the hospital management business, Abhay Soi worked as turnaround specialist and was the head of corporate restructuring at KPMG and EY. The learning of turning around businesses has made sure that he had the wisdom and eye for turning around hospital business of BLk and Nanavati even when he was not having any experience of healthcare business. He was backed by KKR and Radiant invested its own money (350 cr) in re-developing BLK and making it a force to reckon in Delhi circle. Radiant life is one of the top player in medical tourism in India especially because Delhi is the main market for the same and Radiant has BLK in Delhi. Max also has strong presence in Delhi-NCR market. Out of the total combined bed capacity of 3200 beds after merger, both will have some 2400 beds in Delhi-NCR market alone.

I will cover the detailed analysis of healthcare sector in india in another post dedicated to it and will be posting the same within few days. i am leaving it here due to the length of this post.

So after adding the cash of 600 cr and 283 cr investment in Antara and valuation of stake in MHIL at 2136 cr, we are getting the valuation of Max India at 3000 cr and this will prove that stock markets are weird as current market value of Max India is just 1500 cr. My average used to be around Rs. 125 for Max India but in last two months I have picked good quantity in the range of 56-65 and now the average is down to 78 which is a fantastic price to have it. I do not  know what market is seeing here which i am not being able to see because the valuation gap looks too good to be true that too of a top notch group like Max. Fantastic buy at CMP of 56.

Apart from the baove, Max India has another high growth business in max Skill first which is into providing professional skilling solutions. It has been acknowledged as the 5th Best Place to Work for, in a survey among 50 companies in the SME Biz category across major industry sectors in India, by the 'Great Place to Work Institute(GPTW). Earlier it was having Max group companies as its client but now it has expanded the clientele to cover the likes of HDFC, Karur Vysya Bank, Ujjivan and Rattan India. In FY 2019, it imparted over 3.9 Lakh hours of training to more than 1 Lakh learners through 90,000+ sessions to both Max Group and other accounts.  It has grown its revenues very fast to touch 52 cr last year and I think this is going to be one of the future value creater for Max India.

Further, Max Financial services Ltd which holds the life insurance business of group is also trading at very cheap valuations. At CMP of 400 its market value is around 10000 cr which means it is trading at 1.6 times of its Embedded value (EV) which in my view is extremely low for a highly efficient and reputed life insurance player. For a perspective, SBI Life trades at 5 times its EV and HDFC at some 20 times. Last year both SBI Life and Max Fin were trading at 3 times EV so one can see the gross undervaluation. Looks like market is worried about pledged shares (some 80%) but Analjit singh is having high value real estates for backing his debt so he may decide to either sell stake in max Fin or his real estate holdings but there will be no default. So i think Max Fin is also a stunning buy at present and i am buying this one regularly.

Path to salvation for Analjit singh

Max India, Max venture and Analjit singh have one common link and that’s real estate business. Max India will be having 600 cr cash in its books which can be utilized for the expansion of group real estate business. Analjit singh has some of the marquee real estate and hospitality properties across the world but he has high debt to focus on. Max ventures has settled commercial real estate business and the cash flows from the same can be utilized for the further expansion.

But if one can see, the real value will emerge if we can combine the real estate businesses of these three entities and I think this will be the best solution. KKR is already backing Analjit singh and there is high chance for a place for KKR also. Analjit singh has also expressed in so many interviews that they are not afraid of listed companies and they like it because they even run their private businesses just like listed companies. I feel Analjit singh can opt to merge full or some part of his real estate holdings with Max India/Max venture and for this he may further opt to pay off his real estate debt before the merger.

Analjit singh was in development phase of his personal real estate venture and now he has settled most of these and will witness strong growth in revenues like his winery is setting its eye on exports market of Europe, America, Uk and Asia. General public opinion is that Analjit singh has sold healthcare due to tough regulatory environment and high capital requirement but I think this can’t be the case with someone who has crafted and handled those businesses throughout his life time which require large capital amid tough regulations. It is just that he had to choose between Real estate and Healthcare and he chose the former because it is where he wants to manifests his creativity and purpose.

I have seen people living (wasting) whole their life thinking that uniform is the religion and taking care of this uniform is the karma and the purpose. But the real karma is what puts us on the path to salvation all else is just dusting. And path implies effort, dedication and yearning to cross over…uniform is cheap but salvation is dear.

When we use financial analysis we are just taking care of the uniform...Analjit singh is the salvation.

(Update Sep-2020: Max healthcare is listed around 120 in Aug-2020 after demerger from Max India. Max India listed and trading around 60 (12 Rs. for 2 Rs. face value of erstwhile Max India). So total value of both is 120+12=132 which is around 2.5 times of our investment at 56...so it is doing great and still there is a lot of value unlocking is due and both are great long term bets.)

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. Reach me at oscillationss@yahoo.in).