Professional Documents
Culture Documents
October Quest 2016: Strictly Confidential Not For Distribution
October Quest 2016: Strictly Confidential Not For Distribution
Evolved towards being an investor that better appreciates the power of compounding over a long period of
time
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Key Learnings on the Investment Journey
Curiosity
•“Spend each day trying to be a little wiser than you were when you woke up”
– Charlie Munger
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Rational Thinking
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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
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Portfolio Sizing
“The wise ones bet heavily when the world offers them that opportunity…” –
Charlie Munger
•Unlearn CAPM
•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
•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
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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
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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
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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
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The 20% rule
•It is the process of gathering and analyzing data that needs constant
refinement
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Max Group: Strong management team and culture
•Strong execution
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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
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
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)
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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
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Concerns
Reputation risk
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(#)
0.21
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
Standalone hospitals
Multi-geography Hospitals
Source: Bloomberg
Notes
• Estimates as of 2016, from Bloomberg
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Concerns
Reputation risk
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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
Reputation risk
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Max India: Long gestation period
Efficient capital models will drive better profitability
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Concerns
Reputation risk
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Hospitals: Is it similar to hotel industry?
Healthcare is defensive, while hotel industry is more cyclical in nature
(R (R
s) s)
Source: Companies
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Valuation: Trading in line with peers
Valuations in line with other hospitals, but higher operating leverage expected for Max
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Key Takeaways
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Thank You
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