Max Ventures – A Unique Demerger Opportunity

I wrote the below article which analyses Max Ventures in November 2016.


In my last article, I described my investment framework and the four areas of focus. The first two areas which I talked about were:

  1. Demerger situation
  2. New venture started by an established businessman

The special quality about these two situations is that the stock price is artificially depressed for reasons other than the quality of the underlying business. I recently came across an opportunity which is a combination of these two situations – Max Ventures & Industries Limited (MVIL).

MVIL was listed on stock exchanges (NSE and BSE) on 22nd June 2016 at a price of 45 (market cap of c. INR 240 cr.) Over the next few days, it shot upto 78 by 11th July due to inexplicable reasons. Since then its price has been declining and it is almost back to where it started. The decline in price is predictable and it can be attributed to the selling by institutional investors trying to get out of an investment they never wanted to be a part of. As explained before, this is usual for both these areas – Demerger and New Ventures.

Now that we have identified an investment idea where the chances of winning are higher. Next we need to go deeper to understand the details. Is this really as compelling an idea as it looks?

What is MVIL

Max Ventures was created from the three-way demerger of the parent entity Max India. Max India was promoted by Mr. Analjit Singh in 1982. Max India over a period of time got into the following businesses each of which was started and built up from scratch:

  • Life Insurance – Max Life Insurance

Launched in 2000, Max Life is a 74:26 JV with MS&AD Japan. It had grown to become India’s largest non-bank life insurance company at the end of FY15.

  • Hospitals – Max Healthcare

Launched in 2000, Max Healthcare was an equal JV with Life Healthcare, South Africa. In FY2015, Max Healthcare had revenues of INR 1,740 cr across 12 hospitals.

  • Health Insurance – Max Bupa

Launched in 2008, Max Bupa is a 74:26 JV with Bupa Finance PLC, UK.

  • Packaging Films – Max Specialty Films

Launched in 1988, MSF is a leading manufacturer of specialty packaging films with FY16 revenues of c. INR 700 cr.

  • Real Estate – Antara Senior Living

Launched in 2013, Antara is developing senior living communities in India.

In January 2015, Max India announced a demerger which resulted in the following three companies:

  1. Max Financial Services – with Max Life Insurance as the sole subsidiary
  2. Max India – with Max Healthcare, Max Bupa and Antara Senior Living as the subsidiaries
  3. Max Ventures and Industries Ltd (MVIL) – with MSF as the sole subsidiary

The stated purpose of the demerger was to provide more focus to individual companies. Additionally, investors also had the choice of investing in specific businesses. The promoters shareholding in the original company Max India was 40.5% and they would continue to have the same shareholding in each of the demerged companies.

Additionally, Mr. Singh also expressed their desire to increase their shareholding in MVIL to the maximum permissible limit of 75% through a voluntary open offer post the demerger. They announced their plans to use MVIL as their vehicle for exploring opportunities in “wider world of business” including education, real estate and other investment opportunities. Mint carried a good article on this subject which can be assessed from this link.

Just as a side note, the promoters gave the open offer at a ridiculously low price of 31. The stock as mentioned earlier listed at 45 and quickly ran away. After the expiry of the open offer, they did not increase the offer price and as a result their shareholding remains at 40.5%. Come to think of it, one of the reasons of the rally in the stock price could be that people expected the promoters to increase the open offer price and pocket a quick gain. However, due to whatever reasons that has not happened. My conjecture is that promoters will infuse equity into the business in the future and that will increase their shareholding. That still does not answer as to why give a voluntary open offer at a price at which you know no one will tender their shares. That remains an open mystery!!

Subsequent to the demerger, it was announced in August 2016 that Max Financial Services will be merged with HDFC Life to create India’s largest listed Life Insurance Company and the second largest life insurance company in India after Life Insurance Corporation (LIC). In the merged entity, HDFC will own a 42.5% stake, Standard Life 24%, the Max Group 6.6%, Mitsui Sumitomo 7.8% and Axis Bank 1.2%. The transaction also proposes a non-compete fee of INR 850 cr. for Max Life promoters (more on this fee later in the article).

This is where things stand right now. Next, let us take a whirlwind tour of the achievements of the promoters.

Track record of Promoters

Mr. Analjit Singh stands tall at the center of the Max Empire. He has a history of building businesses from the ground up. He entered and exited multiple businesses during the initial years after returning from the US in 1982. Only one out of these 9-10 ventures proved to be enduring which was the telecom JV with Hutchison. He exited this venture in 1998 (too early in hindsight) by selling his stake for close to INR 550 cr to the JV partner Hutchison.

It was after this that he got into life insurance and healthcare businesses in 2000 on the advice of McKinsey. He started the health insurance business much later in 2008. These businesses especially life insurance and healthcare have done quite well over the years.

Max Life Insurance has grown to become the largest non-bank life insurance company in India. Along the way they have got minority investments from New York Life (founding JV partner) at first and Mitsui Sumitomo later. In April 2012, New York Life sold its 26% stake in Max Life Insurance to Mitsui Sumitomo Insurance (MSI) of Japan for INR 2,731 crore. The transaction valued Max Life at INR 10,504 cr. at the time. Max Life will merge with HDFC Life as mentioned above. The rationale behind the merger is beautifully explained by Analjit Singh in this article. The fact that the one of the leading life insurance company in India agreed to the merger says a lot about Max Life.

Max Healthcare has grown to include 12 facilities with over 2,000 beds in North India. They attracted the interest of Life Healthcare Group from South Africa who initially acquired a 26% stake in Max Healthcare in January 2012 for an amount INR 516 cr. This deal put the enterprise value of Max Healthcare at INR 2,300 cr. In November 2014, they increased their stake to c. 46% (to bring it at par with the shareholding of Max Group) with additional investment of INR 766 cr. This transaction valued the entire business at INR 3,650 cr. This represents a CAGR of 16.7% in the valuation of Max Healthcare over this period.

During this period, Mr. Singh has gradually inducted quality management in each of the operating companies and has stepped back from active management giving more power and control to the management teams. During 2008-09, corporate governance framework was strengthened through induction of quality directors on the boards of the holding company as well as the operating companies. Mr. Anuroop (Tony) Singh was appointed as Vice Chairman (Non- Executive) of Max India Limited. In 2011, the role of executive and Chairman were separated with Rahul Khosla coming on board as Managing Director of Max Group. Mr. Singh relinquished the MD position to Mr. Khosla while continuing in his role as executive Chairman. Further, he ceded his responsibilities as executive Chairman to the Managing Director Rahul Khosla and became non-executive Chairman from April 2014. After the demerger, his active involvement with the businesses has reduced further. He will continue on the boards of all the three companies but relinquish the position of non-executive Chairman as well. He has chosen the title of Founder and Chairman emeritus for Max India and Max Financial Services. Post the merger with HDFC Life, he will have no representation either on the board or in management in Max Financial Services. He will continue as non-executive Chairman of MVIL, the only company where he will remain actively involved.

In a sense, he has built these businesses and now that they can stand on their own, he is happy to let them go. This sort of detachment from the business is rare and is a quality to be admired. But there is a sort of contradiction as well here. To build successful businesses over long period of time requires passion and devotion to the business. It would seem that these two qualities – detachment and passion, cannot co-exist. Mr. Singh is aware of this and talks about it in an open and frank way in the interview cited above. In his own words, you must have “affinity” towards the business for it to be successful.

The AFFINITY of a sponsor to a particular business segment is very important. If (Bharti Airtel Ltd founder) Sunil Mittal did not have an affinity for telecom or for technology, Airtel would not have been what it is today (India’s biggest phone services provider). If I did not have an affinity for being in the businesses of life and, therefore, focus on healthcare and insurance for 15-16 years, it wouldn’t have worked. 

Affinity and focus leads to execution, passion capital, heavy-lifting, good team equals to success.

But at the same time, he talks about detachment and impermanence as well:

I so solidly believe in impermanence that for me to be attached to a business, in this case, life insurance, it is stupid to be attached to it. When life is impermanent then what is this stigma about a business being permanent.

Here he is talking in the context of the life insurance business which will be merged with HDFC Life. He realized that scale and distribution capabilities will be crucial factors for life insurance in the future. Power is moving to banks, who are now controlling distribution virtually. He saw the writing on the wall and hence agreed to the merger with HDFC Life.

This combination of affinity and focus and detachment is powerful. To empower your management and to accept that they can run the show better than you. To let the business and the control go to another company because you realize that that is in the best interest of the business. These are the marks of humility. And humility is highly underrated in my opinion as a quality in our business leaders. While intelligence and focus are important but humility has been ignored.

There is no doubt a lot to admire about Mr. Singh. BUT and there is always a but…

Mr. Singh is not and cannot be perfect. He has made mistakes and some more serious than others. I will focus on two here – one with regard to capital allocation and the other with regard to corporate governance and fair treatment of all stakeholders.

He sold the telecom venture too soon just as the telecom revolution was in its infancy in India. But that is easy to say in hindsight and might not have been as clear at the time. Post that he got into life insurance, healthcare, and health insurance and has stuck with these businesses. But even during this period, they have had minority shareholders in all of these businesses and have diluted their shareholding quite a bit over the years. This equity dilution over the years has acted as a drag on the equity value of the Max Group. As a result, an equity share of Max Group has provided a return of c. 16% CAGR during the 15-year period starting from March 2000 – March 2015. While 16% pa is quite a good return over this period but it is not extraordinary. During the same period, Sensex gave a return of 12% pa. Hence, although Mr. Singh has managed an extraordinary feat of building great businesses from scratch, the returns for common shareholders have been quite ordinary. To be fair to the promoters, this might have been necessary because minority shareholders (such as New York Life, Sumitomo Mitsui and Standard Life) had to pump in equity into the businesses to keep their shareholding at the same level over the years. But the returns for average shareholders are what they are and the data speaks for itself.

Now, let me come to the second and the more serious point. As a background – as part of the merger with HDFC Life, it was envisaged that the promoters of Max Group (Mr. Singh) will receive a non-compete fee of INR 850 cr to stay out of the life insurance business for the next 4 years. Now, there are several problems with this proposal and these have been highlighted by many proxy advisory firms as well. Firstly, they are getting out of the life insurance business because as explained very persuasively by Mr. Singh the contours of the business are changing and scale is going to be the decisive factor going forward. Hence it would make more sense to merge it with a larger entity to create one of India’s largest life insurance business. If so it would make little sense for Mr. Singh to get into life insurance again. Hence this is not really non-compete fee as hinted by some publications as well. It is something else (compensation for the Max Group promoters to stay away from active management??) masquerading as non-compete fee. Secondly, and this one takes the cake really, for there is no explanation for it. This non-compete fee will be paid by the merged entity which means that a part of this will also be paid by the shareholders of Max Financial. This is egregious and doesn’t make any sense whatsoever. Even if the non-compete fee (which itself doesn’t make too much sense) could be imposed on the common shareholders, the gentlemanly thing for the promoters would have been to limit this to only shareholders of HDFC Life. But gentlemen they are not. Despite the concerns raised by AMFI and numerous proxy advisory firms, they went ahead with the transaction as it is without so much as a word!

The track record of Mr. Singh is illustrious and speaks for itself. I do not have too much to add to that. However, as we have seen that the record is not totally clean and contains some patches.

Next, let me give a brief overview of MVIL.

Max Ventures and Industries Limited (MVIL)

MVIL will be used as an investment vehicle for the promoters of Max Group going forward. They have announced plans for getting into the following sectors:

  • Manufacturing
  • Real Estate
  • Education
  • Investing

Manufacturing – Max Specialty Films (MSF)

The Group is already into manufacturing business through their sole established subsidiary MSF. MSF is engaged in the manufacturing of BOPP (Bi-axially Oriented Polypropylene) films and have capacity of approx. 50,000 tonnes per annum (TPA). BOPP films are one of the most prominent of polymer films used in flexible packaging. These films play a critical role in packaging of processed foods, confectionery, fast moving consumer goods (FMCG) and industrial goods. The company is also a leading producer of Graphic Lamination films for print finishing and luxury packaging. The Company exports approximately 30% of its output. Europe is the largest overseas market but there is a growing presence in markets such as Japan and America too.

The global market for BOPP films is 8,200 KTA and the total market for polymer films for flexible packaging is $120 bn and growing at 2.5%.

Its products are used by leading players in food packaging, overwrapping, consumer products, labels and textile industries. MFS’s customers include most major convertors and blue-chip FMCG companies. The high growth food industry accounts for 66% of MSF output and though the Company has only 11% share of the country’s installed capacity, its market share in the Specialty films segment is over a third of total demand.

Please find below a brief financial snapshot of the company – the information which i could find:


However, BOPP films are a commodity product and hence MSF is a price taker. Which means that the price of the films is determined by the market based on supply and demand and they have to sell at the market determined price. Packaging is essential and hence demand for their products products will always be there. However, due to the commodity nature of the product, their returns (and profitability) have been and will continue to be ordinary at best. To enhance their profitability, they will need to enhance their capabilities and get into manufacturing value added films or any other related products. They have hinted at the possibility of doing value added manufacturing and I quote from the interview cited above-

I do and on the manufacturing side, I can’t tell you anything today. I hope I can tell you in 60 days. We will, if all goes well, we will be in that space, in the prime minister’s central part of his vision… Make in India. I will give you a beautiful project, if it succeeds, I don’t know, I can’t tell you today, we are working on it. I can’t tell you what it is today. But if it succeeds, Mr. (Narendra) Modi will use this as an example of Make in India.

Our manufacturing space is only in one sector, which is polymers area. I am talking about that area, I am not talking about planes or furniture or phones or cars.

Additionally, MSF has also announced plans for investment of INR 250 Cr to increase its production capacity by 60% to over 75,000 tonnes per annum. The line is expected to commence operations from Q3 of FY 2017-18 and is expected to generate additional revenues of approximately INR 400 crore by FY 2019-20.

Finally it is worth noting that in 2012, Germany’s Treofan had agreed to acquire MSF at a valuation of INR 540 cr (link). Ultimately, the transaction did not go through due to change in strategy of Treofan (link).

Real Estate – Max Estates

MVIL has announced plans to get into real estate sector which will be managed through a newly incorporated entity called Max Estates. They have already commenced work on the first project in Dehradun. Few details about this project are currently available.

However, real estate is a sector which is on the cusp of a turnaround in India as I have explained in detail in an earlier post. This is a great time to get into real estate, especially if it is done with integrity and transparency, qualities which are lacking in majority of the real estate developers currently.


Again little details on this vertical are available but Mr. Singh says the following about education in the article referenced above.

Education is one of them, but it is a little too premature to talk about. In education, we have started some work. Are we engaged in it? Yes, but what are we going do, I don’t know. But we have decided to be in that sector, so I don’t know whether its 0 to 11 or KG to 16.

Investing – Max I. Limited

Finally, they have incorporated a subsidiary under MVIL called Max I. Limited. Through this entity, they plan to invest in early-stage organizations, “with sound business models and proven revenue stream, across identified sectors such as Hospitality, Food and Beverages, Healthcare, Technology-based Financial Services, Education, Real Estate and Senior Living.” Max I Limited announced its first investment in the Food-and-Beverage firm Azure Hospitality Pvt Ltd in May 2016. They bought a minority stake by investing INR 33.5 cr for acquiring 11.2% stake in Azure.


It will be exciting to see what Mr. Singh will do next. There are clearly identified sectors where they want to invest. They do have a track record of building businesses from scratch in varied industries including life insurance, health insurance and hospitals. Additionally, they have also demonstrated scaling up the businesses by attracting and nurturing quality human resources. Along the way, they have been assisted by capital investments from some marquee investors. Currently all of the businesses (except MSF) are at a nascent stage. We will have to wait and watch as to how these evolve in the coming months and years. The intent from the promoters is certainly there and that is all that might be needed. Talent and capital should not be a problem and with a little bit of luck, this story can really take off.



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