The CLSA-led offering is the second largest QIP by an Indian issuer since new regulations were put in place in the first half of last year to make these types of transactions possible. According to bankers, it is also the largest equity transaction completed with a sole bookrunner in India in the past five years, making the deal something of a coup for CLSA.
The price was fixed at Rs240, or just below the mid-point of the indicated range of Rs231 to Rs251, after attracting solid demand from 27 almost exclusively international investors. The non-Indian interest is likely to have pleased the company as one of the key aims of this placement - aside from raising fresh capital for expansion û was to broaden the investor base and improve the liquidity in the tightly held stock.
Contrary to all other QIPs, which have been completed through accelerated bookbuild transactions, Max chose to go on a full global roadshow. This allowed it to meet with about 100 potential investors, of which at least 50 where completely new to the company. The hope is that this use of the placement as a bit of an investor relations exercise will help boost interest for the stock in the secondary market as well.
At present the stock is very thinly traded, which is evidenced by the fact that the $240 million placement accounts for a massive 480 days of trading volume. The freefloat will nearly double to 38% from 21% as a result of the trade. However, with only 27 investors buying into the deal, and sources describing the book as being both high quality and long term, it is questionable how much impact the placement will have on the daily turnover.
Still, the rules regarding QIPs say the shares cannot be placed with more than 49 accounts (account in this respect means any sub-account requiring its own order form) and as more than one of the large investors in this deal were said to have needed to split their orders on multiple accounts û in one case as many as 10 û there wasn't room for many more takers.
Sources say the order book was about 2.3 times covered with 80% long-only funds in the book. About 40% of the allocations went to US investors, while the remainder was split evenly between Asia and Europe.
Max sold 18.8% of its enlarged share capital, which at the final price worked out to be 41.67 million new shares. As the company had approval to raise up to Rs10 billion and wanted to maximise the funds raised, the number of shares on offer was initially set in a range between 40 million and 43 million and then adjusted to get as close as possible to that maximum.
Investors were said to have liked the deal because of the strong growth prospects, especially within the life insurance segment which accounted for 80.1% of the groupÆs consolidated income in the fiscal year to March 2007. That business, which is operated through a joint venture with New York Life International, has seen its revenues grow at 100% per annum over the past three years, driven by a growing middle class population, rising personal wealth and an increasing need for and awareness of insurance products, sources say. The joint venture currently ranks as the fifth largest private insurer in India.
A source familiar with the company notes that India currently has a relatively low penetration of premium-based insurance at about 2.5% of gross domestic product, versus a world average of 7.6% and an Asian average of 10%, which suggests there is a lot of room for growth.
Indeed, during the roadshow, the company was telling investors that it expects the insurance business to grow by at least 50% per year over the next 5 years. As the business grows larger it obviously gets harder to continue to double in size every year, but some observers still say 50% revenue growth may be too conservative. Max owns 73.25% of the life insurance JV.
Investors no doubt also liked the fact that private equity firm Warburg Pincus owns about 28% of Max as this would serve as something of a quality stamp on the business. The controlling shareholders held 41% of the company before the placement.
Warburg Pincus also has a direct 20.9% stake in MaxÆs healthcare business, which contributed 9.3% of the consolidated income in fiscal 2007. Max owns 72.85% of this business, which operates a network of five hospitals, two specialty medical centres and nine clinics in the New Delhi Metropolitan area. The healthcare business has yet to turn profitable, although the company estimates this will happen quite soon as there is a need for good medical services in India.
Analysts argue that Max is in a good position to benefit because of its strong and well-recognised brand which means it is able to attract good doctors.
The company also operates a clinical research business and a healthcare staffing business, which provides vocational training for Indian healthcare professionals, particularly nurses, for placements in hospitals in the US. Both these businesses currently provide less than 1% of the income, but are expected to grow steadily.
Since it was first set up in 1982 as a manufacturer of penicillin-based bulk drug intermediaries, the company has been engaged in a variety of businesses including semiconductors, telecom - via its stake in Hutchison Max Telecom û IT and the manufacturing of electro-plating chemicals for use in printed circuit boards. All of those businesses have been divested, but Max still hangs on to its leather finishing foil unit and it is also one of IndiaÆs leading producers of flexible packaging films. These two units both sort under the Max Specialty Products division, which contributed 8.3% of the consolidated income in the most recent fiscal year.
The key challenge for the management and CLSA during the marketing of this deal was to get investors to understand and accept the valuation of the company. Insurance companies are normally valued on the basis of their embedded value, but since Max moved into life insurance only in 2000, its business is still too new to have built up much of a base of premium-paying clients.
Consequently, CLSA chose to use an appraised value, which aside from the embedded value (which is very small) also incorporates estimated profits. This resulted in a valuation of about Rs240 per share for the insurance business and Rs45 per share for the healthcare business, or just over Rs300 per share for the entire company when included the other divisions as well.
This would suggest that the placement was offered at a discount of more than 20% to the asset value. Compared with Friday's closing price of Rs257.35, the discount was a much more modest 6.7%, however. The share price has gained about 51% so far this year.
It is also possible that some investors were put off by the fact that the company seems eager to get into yet more new businesses even after divesting most of its non-core operations since 2000 when it underwent a shift to focus primarily on life insurance, healthcare and clinical research.
However, as long as the new businesses are in related areas, such moves could make a lot of sense. In the listing document the company said it is evaluating ôthe possibility of entering potential related businesses such as health insurance, retail pharmacy and health products in the futureö to leverage its knowledge and strengths.