October Quest 2016
Strictly Confidential Not for Distribution
Background
Evolved towards being an investor that better appreciates the power of compounding over a long period of
time
1997 to 2001 2001-2007 2007 - 2009 2010 - present
BSBA in Finance Lehman Brothers Voyager Advisors, First Voyager Advisors,
University of Richmond Equity Research analyst Analyst Director
(Mumbai) (Mumbai)
(Virginia, USA) (New York)
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Key Learnings on the Investment Journey
Curiosity
“An investment in knowledge pays the best interest” – Benjamin Franklin
•Inbuilt thirst to become more knowledgeable
•What will I learn today?
•Ask the questions, seek the answers
•“Spend each day trying to be a little wiser than you were when you woke up”
– Charlie Munger
4
Rational Thinking
“It is easier to rationalize than it is to be rational” – Warren Buffett
•In some cases rationality is part of your temperament
•Challenges come from several behavioral biases:
•The fear of missing out
•Availability of information
•Anchoring
•Loss Aversion
•Constantly review past decisions and eventual outcomes
•Be true to yourself
5
Probabilistic Mindset
“Take the probability of loss times the amount of possible loss from the
probability of gain times the amount of possible gain. That is what we're trying
to do.” – Warren Buffett
•Helps you ingrain the margin of safety
•Actively list out different scenarios and assign probabilities
•Repeating the process helps in the ability to develop mental models.
•Use a reference group of past decisions to better estimate probability
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Portfolio Sizing
“The wise ones bet heavily when the world offers them that opportunity…” –
Charlie Munger
•Unlearn CAPM
•Opportunities stacked in your favor come rarely, capitalizing on them is the
key to outsized returns
•Caveat – need to have the right analytical skills and probabilistic mindset to
identify these opportunities.
•This is not for the faint hearted. However, if you don’t back yourself, you are
not even giving yourself a chance
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Patience
“The big money is not in the buying and the selling… but in the waiting.” –
Charlie Munger
•Timing market is difficult; buying back compounders even more
•Patience does not equate to laziness
•Be “Actively open minded”
•Noise vs Signal - constantly look back at the reason you invested and if that
still holds valid
•For high growth compounders, over long period of time, stock returns will
largely equal earnings growth
8
Understand the Business
“Know what you own and know why you own it” – Peter Lynch
•Drill down to the nuts and bolts of how the business operates
•Maintain a “too difficult” bucket
•“If you’re prepared to invest in a company, then you ought to be able to
explain why in simple language that a fifth grader could understand, and
quickly enough so the fifth grader won’t get bored.” – Peter Lynch
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Understand the Intrinsic Value of the Business
“Price is what you pay. Value is what you get” – Warren Buffett
•"Warren Buffett is famous for talking about the 'intrinsic value' of stocks. But
while many people parrot this phrase, few know what it really means." -
Robert Kiyosaki
•Intrinsic value: It is the discounted value of the cash that can be taken out of a
business during its remaining life.
•Think along the lines of magnitude and sustainability of cash flow for each
business
•“Remember, cash is a fact, profit is an opinion.” – Al Rappaport
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Quality of Management
“In looking for people to hire, look for three qualities: integrity, intelligence and
energy. And if they don’t have the first, the other two will kill you.” – Warren
Buffett
•“My life experience is, once someone puts his hand in your pocket, he will do
so again.” – Chuck Akre
•Drive and passion towards building a business
•Rational thinking and probabilistic mindset to adapt to dynamic world
•History of capital allocation
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The 20% rule
20% of your investment process gets commoditized every year
•Investing is like running on a treadmill – you have to keep moving forward to
stay where you are
•The core tenets of investing don’t change
•It is the process of gathering and analyzing data that needs constant
refinement
•What can I do differently that can give me an edge in understanding the
business better?
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Max Group: Strong management team and culture
•Analjit Singh – serial entrepreneur with significant value creation
•Strong execution
•‘Sevabhav’, Credibility and Excellence – cornerstone of culture across
businesses
•Disciplined capital allocation
•Value unlocking for minority shareholders through demerger
14
Max Group: Strong track record in Life insurance
Max is among the best life insurance companies across different metrics
• Fourth largest life insurance company with industry leading growth, margins and return ratio
Increase in market share
Operating ROEV NBAP margin Persistency
since 2010
Max Life 2.8% 16.9% 17.1% 79%
HDFC Standard Life 4.0% 17.6% 20.5% 79%
ICICI Pru Life 0.5% 12.2% 8.1% 82%
SBI Life -1.1% NA 14.2% 59%
Bajaj Allianz Life -5.1% 5.5% -7.5% 63%
Source: Companies
Notes
• NBAP margins are post overrun
• Persistency represents 13 month persistency
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Max Group: Strong track record
28% annualized returns over last 15 years
(Rs Market Capitalization (Rs13,6
cr) 00 cr)
28%
CAGR
(Rs300
cr)
Source: Bloomberg
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Healthcare Opportunity
Healthcare Opportunity: Huge latent demand
Per capita healthcare spend in India only $85 a year compared to global average of $1,040
($ (X
) )
Source: WHO
18
Healthcare Opportunity: Several catalysts to drive demand
Private hospital business to grow from $60 billion in 2015 to $120 billion by 2020, at a CAGR of 15%
Rising per capita income Increase in insurance penetration
(Rs '000) (Rs cr)
21%
11% CAGR CAGR
Significant PE investment in the healthcare in last few years Increase in MBBS seats and medical colleges
(US$
mn)
Source: IMF, Medical Council of India, VCCEdge
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Max India: Network effect in NCR region
Service
Quality
Patients doctors
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Longevity: Apollo has created significant wealth in last 15 years
Apollo has delivered 20% CAGR in hospital EBITDA in the last 12 years
( (
# R
) s
m
n
)
Source: Company
21
Longevity: Apollo has created significant wealth in last 15 years
Apollo has delivered 25% annualized return over last 15 years
(Rs cr)
Market
Capitalization
(Rs20,400 cr)
25%
CAGR
(Rs700
cr)
Source: Bloomberg
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Centralized hub vs expansion in smaller towns
Max focused on developing medical hub in Delhi vs expanding into smaller towns
• High quality doctors • Inability to attract quality doctors
• High end tertiary care • Poor paying capacity
• High paying capacity • Delay in approvals for greenfield expansion
• Patients prefer to travel to large cities for high
end tertiary care
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Concerns
Low ROCEs in hospital business
Reputation risk
Long gestation period
Is it similar to hotel industry?
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(#)
Consolidation phase: Pace of bed additions to slow down
Max has 40% of beds less than 3 years old, compared to 20% for Apollo and Fortis.
0.21
New beds to 0.20 0.43
total beds/
Source: Companies
25
Consolidation phase: Deliver mid teen ROCE in 5 years
As the hospital matures, utilization, ARPOB and margin increases, resulting in improved ROCEs
Source: Company
26
Low ROCEs: Standalone hospitals have strong profitability
Expect Max Saket to report superior performance, similar to other standalone hospitals
• Standalone hospitals like Bumrungrad Hospital (in Thailand) and Raffles (in Singapore) growing operating profits in
mid-teens and consistently delivering high ROCEs, as compared to large hospital chains
EBITDA margin (%) ROE (%) ROCE (%)
Standalone hospitals
Bumrungrad Hospital 29.9% 29.1% 19.1%
Raffles Medical 22.4% 12.1% 11.2%
Multi-geography Hospitals
IHH 25.1% 4.5% 4.4%
Fortis 5.2% -0.6% 0.01%
Source: Bloomberg
Notes
• Estimates as of 2016, from Bloomberg
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Concerns
Low ROCEs in hospital business
Reputation risk
Long gestation period
Is it similar to hotel industry?
28
Max India: Reputational risk
Culture that puts high value on excellence and credibility
“Working with Max gives the opportunity to work with the latest technology and procedures ahead of peers”
- Doctor working in the cardiac division
“Doctors are trained to strictly adhere to procedures and not cut corners, as it is key to brand and reputation of
the hospital”
- Administration head at Max Saket
“We felt we were in safe hands in Max. The other hospitals had used us as ATM machines, extracting money for
little care”
- Patient undergoing IVF surgery in Max
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Concerns
Low ROCEs in hospital business
Reputation risk
Long gestation period
Is it similar to hotel industry?
30
Max India: Long gestation period
Efficient capital models will drive better profitability
Acquisition of standalone hospitals
Joint venture with a real estate developer
Divestment of land and building into REIT
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Concerns
Low ROCEs in hospital business
Reputation risk
Long gestation period
Is it similar to hotel industry?
32
Hospitals: Is it similar to hotel industry?
Healthcare is defensive, while hotel industry is more cyclical in nature
(R (R
s) s)
Source: Companies
33
Valuation: Trading in line with peers
Valuations in line with other hospitals, but higher operating leverage expected for Max
Mcap ROE EV/EBITDA EV/EBITDA
EBITDA margin (%)
(US$ mn) (%) 2017 (X) 2018 (X)
Max healthcare 566 10.2% 1.1% 24.0 19.0
Apollo Hospitals 2,820 12.9% 10.0% 22.5 18.9
Bumrungrad Hospital 3,855 29.9% 28.1% 22.9 20.4
Raffles Medical 2,037 22.4% 12.1% 26.3 22.8
IHH Healthcare 12,935 25.1% 4.4% 22.0 19.2
Source: Bloomberg, Companies
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Key Takeaways
• Large addressable market
• Strong management team with proven track record
• Culture of integrity and excellence
• Network effect in NCR Region
• Operating leverage from consolidation phase
• More capex efficient going forward, driving FCF generation
• Compound in line with EBITDA growth at 25%
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Thank You
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