Star Health IPO — Here’s All You Need to Know

India’s IPO stars may have dimmed lately but the market is gearing up eagerly for yet another unveiling.

Star Health and Allied Insurance (hereinafter referred to as “Star Health’’) is the next one lined up on the ramp with plans to raise ₹7,249cr ($974m) (at the upper band). As one of the leading private health insurers in the country, and one that is backed by marquee investors such as Rakesh Jhunjhunwala, Westbridge Capital etc., Star Health’s public issue is set to make for an interesting debut.

We present you with an exclusive scout on the investing details.

IPO Facts

• Issue Size: ₹7,249cr = (Fresh issue: ₹2,000cr ($268.7m)) + (Offer for Sale: For upto 58,324,225 equity shares).
• Price Band: ₹870–900 ($12)
• Subscription Begins: November 30th
• Market Lot: 16 shares
• Issue Breakup: (QIBs: 75%), (NIIs: 15%), (Retail investors: 10%).

There is a reservation of shares worth ₹100cr ($13.4m) for the employees. The primary part of the issuance is intended to improve the company’s capital and solvency levels.

As on the date of prospectus, promoter and promoter groups hold 62.8% in the company. Their pre-offer equity shares are as follows:

1. Safecorp Investments India LLP (i.e. WestBridge’s AIF): 47.77%
2. Konark Trust: 0.22%
3. MMPL Trust: 0.02%
4. Rakesh Jhunjhunwala: 14.98%
5. Rekha Jhunjhunwala (Mr. Jhunjhunwala’s wife): 3.23%

The first three in the list are partly selling their holdings. While the Jhunjhunwalas have chose to retain their shares, market results and valuations seem to indicate that the “Big Bull” may witness his investments multiply by as many as six times following this IPO.

In the event of a fully-subscribed issue, Star Health will emerge as the third-largest IPO this year after Paytm and Zomato.

Company Profile

Star Health was incorporated in 2006. Based out of Chennai, the company primarily focuses on the retail health insurance market segment. Its offerings include a wide range of products within retail health, group health (serving corporates and SMEs), personal accident cover and overseas travel cover, which respectively account for 87.9%, 10.5%, 1.6% and 0.01% of the total gross written premiums (GWP) received in FY21.

As of September 30th 2021, Star Health commands a market share of 15.8% in the country’s insurance market (steadily increasing from 10.9% as at 2018).

The company distributes its policies via agents, brokers or banks. It also has one of the largest network distributions in India with 779 health insurance branches across 25 states and five UTs. Plus, it claims to have one of the largest hospital networks in the country with nearly 11,778 partner hospitals.

Its strength lies in two prominent categories. One, its large presence in the retail health segment. Two, its diversified product suite (majorly across retail and corporate with minor exposure to Government health). In the past, the company has also been taken note of for its strong risk management with a superior claims ratio and quality customer services.

Company Financials

Operating and financial performance remains healthy. However, in the six months period ended September 2021, the company posted a loss of ₹3.8bn ($51m) (first time in the last three years) compared to a profit of ₹2bn ($26.8m) in the year-ago period.

In FY21, Star Health’s GWP in the retail health segment was three times that of its second-largest retail health insurance competitor (HDFC Ergo). In a country with low insurance penetration, high out-of-pocket healthcare costs and the fact that only 10% of the population has insurance policies other than Government plans, a large retail presence like that of Star Health is abundantly opportunistic.

However, it must be kept in mind that the same pandemic which could be a key driver for the company’s business might also impede its growth by way of increasing the liabilities for claims sought by policyholders. For big retail health insurers like Star Health especially, the claims could rise to dangerous levels.

For instance, while the company’s total premiums have been steadily rising, its combined ratio spiked to 121% in recent months due to rising claims, thus ensuring a lack of profitability in underwriting terms.

But having said that, Star Health’s solvency ratio stands at an impressive 2.23 (against the minimum required level of 1.52 — pg 32, RHP). It has also become the market leader in terms of number of policies issued in FY21 (28% CAGR from FY18 — pg 147, RHP).

Industry and Business Overview

It is no secret that the Indian health insurance market continues to be severely underpenetrated (a meagre 0.39% of GDP — pg 161, RHP). But the rate of penetration seems to have made marked improvements for a while now.

Between FY02 to FY21, the average national health insurance premiums increased by 86 times (pg 126, RHP). And the biggest gainers of this growth have been standalone insurers (or SAHIs) whose growth has been much faster than the overall industry. Although Star Health has a visible edge in terms of established presence and retail networks, the industry as a whole seems heavily competitive with many other players (in both non-life and standalone categories) with strong market presence.

Key growth drivers in the expansion of the insurance market are a) favourable Government policies to improve coverage, b) rising income levels to afford premiums, c) changing demographic profile, and d) offers of innovative products.

Although most of these indicators have shown promising growth over the previous decades and there has been a visible decline in the market share of public sector insurers, non-life insurance packages seem to witness sluggish growth compared to those in life insurance. Be it dearth of agents to market products, retail participation or “bancassurance”, there is a wide gap between the two categories which has been bogging growth in segments like retail health.

Things to Know Before You Buy

The Star Health IPO comes at a critical time where after months of a booming market, investors’ appetite in India is finally being put to test. With Paytm slumping c. 30% within a week of listing and beginning to stir up a phobia among other upcoming listers (MobiKwik etc.), valuation of upcoming IPOs will be under a close watch.

Even so, the grey market premium for Star Health looks good (at ₹150 ($2) or 16.7% over the upper price band as of yesterday’s close). Plus, the Jhunjhunwala-backing and their decision to retain investment in the company has fomented retail enthusiasm considerably.

On the financial front, the company looks jacked as well with expenses standing at a little over 29% of gross premiums, the lowest among all standalone insurers in the country. Besides this, given the scalability of the existing network of branches and agents, Star Health has the potential to support and manage additional capital exercises and expansion.

When it comes to risks, the rise in incurred claims ratio (from 63.5% to 94% in FY21) that has resulted in losses for over a year, stands out. The asking price of the IPO lies in the P/E range of 989x (three-year weighted average EPS) which is much higher than peers like ICICI Lombard (47x) and New India (15.3x) while the industry average is at 31x. The company is valued at 15.6x its book value which also demonstrates a significant premium!

It will be interesting to see how Star Health goes to the floor on December 10th amidst the ongoing straddles that have weighed down the markets in India recently.

(Originally published December 2nd 2021 in transfin.in)