Star Health Insurance IPO review (Avoid)

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Review By Dilip Davda on November 24, 2021

•    Star Health is one of the largest health insurance companies in India.
•    It is suffering severe setbacks since the pandemic and fared poorly for FY21 and H1-FY22.
•    Due to negative earnings for the last 18 months, its P/E cannot be ascertained.
•    The issue is aggressively priced based on its latest financial data.
•    One may buy it at discount post listings.

PREFACE:
Post pandemic health insurance segment has gained momentum, however, the health insurance companies have suffered a lot due to onetime higher claims on account of pandemics and that has haywire their financial performance. This segment has also turned highly competitive due to over half a dozen primarily health insurance players along with other general insurance companies offering health insurance. Based on its current financial status, this issue appears aggressively priced. Because of its negative earnings for the last 18 months, it has kept 10% for Retail investors but that should not be considered as the criteria to apply for this IPO. In all probabilities, it may quote at discount post listing. A recent episode of One 97 (PayTM) might see a re-run here.

ABOUT COMPANY:
Star Health and Allied Insurance Co. Ltd. (GFIL) is and continue to be the largest private health insurer in India with a market share of 15.8% in the Indian health insurance market in Fiscal 2021, according to CRISIL Research. In Fiscal 2021 and the six months ended September 30, 2021, it had a total GWP of Rs. 9348.95 cr. and Rs. 5069.78 cr., respectively. From being the first standalone health insurance ("SAHI") company established in India in 2006, it has grown into the largest SAHI company in the overall health insurance market in India, according to CRISIL Research. Star Health's comprehensive health insurance product suite insured 20.5 million lives in Fiscal 2021 in retail health and group health, which accounted for 89.3% and 10.7%, respectively, of its total health GWP in Fiscal 2021. 

It is strategically focused on the retail health market segment and had a retail health GWP of Rs. 8215.09 cr. and Rs. 4339.92 cr. in Fiscal 2021 and the six months ended September 30, 2021, respectively. It has been consistently ranked first in the retail health insurance market in India based on retail health GWP over the last three Fiscal Years, according to CRISIL Research. The retail health market segment is expected to emerge as a key growth driver for the overall health insurance industry in India after the COVID-19 crisis in India due to low penetration of health insurance, high out-of-pocket expenses for healthcare costs and since only 10% of the population has insurance policies outside of government plans, according to CRISIL Research.

In Fiscal 2021, its retail health GWP was over three times the retail health GWP of the next highest retail health insurance market participant, according to CRISIL Research, positioning it well to continue to grow business and market share. The Indian health insurance market continues to be underpenetrated, with a health insurance penetration of only 0.36% of GDP in 2019, compared to the global average of approximately 2.0% of GDP, according to CRISIL Research. India has one of the lowest health insurance densities globally, based on per capita premium, at US$5 in 2019, according to CRISIL Research. 

A number of demographic factors, including increasing life expectancy and population growth in India, as well as the high portion of out of pocket expenses as a percentage of total healthcare expenditure by patients in India (62.67% in 2018), are driving the need for healthcare services and the growth in the health insurance industry in India, according to CRISIL Research. Awareness of health insurance in India has been growing, including as a result of measures taken by the Government of India, and this trend has been accelerated by the prospect of hospitalization due to COVID-19, as well as the rising cost of medical care in private hospitals and the need for health insurance, according to CRISIL Research.

The retail health insurance segment, which accounted for 9% of the total number of lives covered by health insurance in India in Fiscal 2020, contributed 45% of the total health GWP generated in the overall health insurance market in Fiscal 2021, according to CRISIL Research. This was primarily due to retail health's higher premium per person compared to other health insurance segments, according to CRISIL Research. Profitability in the retail health insurance segment is also being driven by customer loyalty, which is higher than other health insurance segments, as well as lower claims ratios, which were 73% in retail health, compared to 99% in group health and 92% in government-sponsored health schemes in Fiscal 2020, according to CRISIL Research. 

In addition, SAHI insurers only had a claims ratio of 59% in relation to their retail health business in Fiscal 2020, compared to 67% and 92% for the private sector and public sector insurers, respectively, according to CRISIL Research. The company distributes its health insurance policies primarily through individual agents, which accounted for 78.9% of GWP in Fiscal 2021. Individual agents are the primary method of distribution in the health insurance industry since health insurance is largely an assisted product in which customers often require help in selecting the policy best suited to their needs and during the claims process. As of March 31, 2021, it had the largest number of individual agents among SAHI insurers, at approximately three times that of the SAHI company with the next highest number of agents, according to CRISIL Research.

Star Health's total number of individual agents grew at a CAGR of 27.3% from 0.29 million as of March 31, 2019, to 0.46 million as of March 31, 2021, and was 0.51 million as of September 30, 2021. Under the Insurance Regulatory and Development Authority of India (Appointment of Insurance Agents) Regulations, 2016, insurance agents are only permitted to sell the policies of three insurers: one life insurance company, one non-life insurer and one health insurer. 

As of September 30, 2021, its distribution network had grown to 779 health insurance branches spread across 25 states and 5 union territories in India. The company's existing branches are also supplemented by an extensive network of over 562 Sales Managers Stations, which are small individual service centres, and over 6,892 in-house sales managers, as of September 30, 2021. Its other origination channels include distribution by direct online sales through telemarketing and its website, brokers, insurance marketing firms and web aggregators.

It has also successfully built one of the largest health insurance hospital networks in India, with 11,778 hospitals as of September 30, 2021. Out of the total number of hospitals in-network, it has entered into pre-agreed arrangements with 7,741 hospitals, or 65.7%, of the total number of hospitals in its network as of September 30, 2021, and in Fiscal 2021 and the six months ended September 30, 2021, it processed 0.33 million and 0.25 million claims, respectively, or 55.0% and 62.0%, respectively, of a total number of cashless claims, through agreed network hospitals.

ISSUE DETAILS/CAPITAL HISTORY: 
To part finance its plans for augmenting its capital base Star Health is coming out with a maiden IPO of equity shares of Rs. 10 each via book building combo offer to mobilize Rs. 7249.18 cr. at the upper cap of the IPO pricing. The company will be issuing fresh equity shares (22222224 shares) worth Rs. 2000 cr. and an offer for sale of 58324225 equity shares (worth Rs. 5249.18 cr.). The company has fixed a price band of Rs. 870 - Rs. 900 per share and minimum application is to be made for 16 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 14% of the post issue paid-up equity capital of the company. 

The company has reserved shares worth Rs. 100 cr. for its eligible employees and is offering a discount of Rs. 80 per share to them. Out of the balance portion, it has allocated 75% for QIBs, 15% for HNIs and 10% for the Retail investors.  

The issue opens for subscription on November 30, 2021, and will close on December 02, 2021. Post allotment, shares will be listed on BSE and NSE. 

The joint Book Running Lead Managers (BRLMs) to this offer are Kotak Mahindra Capital Co. Ltd., Axis Capital Ltd., BofA Securities India Ltd., Citigroup Global Markets India Pvt. Ltd., ICICI Securities Ltd., CLSA India Pvt. Ltd., Credit Suisse Securities (India) Pvt. Ltd., Jefferies India Pvt. Ltd., Ambit Pvt. Ltd., DAM Capital Advisors Ltd., IIFL Securities Ltd. and SBI Capital Markets Ltd. while KFin Technologies Pvt. Ltd. is the registrar to the issue. 

Having issued initial equity at par, the company raised/converted further equity capital in the price range of Rs 14.74 to Rs. 488.96 between July 2010, and September 2021. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. NIL, Rs. 47.00, Rs. 113.60, Rs. 114.06, Rs. 142.43, Rs. 142.44, Rs. 152,34, Rs. 155.28, Rs. 158.42, Rs. 164.25, Rs. 174.37 and Rs. 175.69 per share. 

Post issue, Star Health's current paid-up equity capital of Rs. 553.29 cr. to Rs. 575.51 cr. Based on the upper price band of the issue, the company is looking for a market cap of Rs. 51796.10 cr. 

FINANCIAL PERFORMANCE: 
On the financial performance front, Star Health has posted total income/net profits (loss) of Rs. 226.25 cr. / Rs. 128.23 cr. (FY19), Rs. 461.96 cr. / Rs. 268.00 cr. (FY20), Rs. - (907.78) cr. / Rs. - (825.58) cr. (FY21). Thus is has suffered a severe setback for FY 21 on account of the pandemic year and that prolonged till now as for first half of FY22 ended on September 30, 2021, it has incurred a loss of Rs. - (380.27) cr. on a total income of Rs. - (494.68) cr. 

For the last three fiscals, Star Health has posted an average EPS of Rs. 0.91 and an average RoNW of 7.79%. The issue is priced at a P/BV of xx based on its NAV of Rs. 57.83 as of September 30, 2021, and at a P/BV of xx based on its post-issue NAV of Rs. 90.33 (at the upper cap). As of the said date, its profit and loss account has a debit balance of Rs. 1104.79 cr. 

As the company has posted losses for FY21 and H1-FY22, its P/E cannot be ascertained. 

DIVIDEND POLICY:
The company has not paid any dividends on the equity shares from FY19 till the filing of this offer documents. It will adopt a prudent dividend policy post listing based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per offer documents, the company has shown ICICI Lombard and New India Assurance as its listed peers. They are currently trading at a P/E of 56.18 and 26 (as of November 24, 2021). However, they are not truly comparable on an apple to apple basis. 

MERCHANT BANKERS' PERFORMANCE:
Out of the total 12 BRLMs, the eight BRLMs associated with this issue have handled 63 public issues in the past three years, out of which 21 issues closed below the offer price on the listing date.

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