Star Health IPO Fundamental Analysis (Avoid)

Key Business Highlights

Incorporated at Chennai in the year 2005, Star Health and Allied Insurance (the ‘Issuer’) is the private health insurer in India with a market share of 15.8% in the Indian health insurance market in FY21.
The comprehensive health insurance product suite insured 20.5 million lives in FY21 in retail health and group health, which accounted for 89.3% and 10.7%, respectively, of the total health GWP (Gross Written Premium) in FY21. The Issuer is strategically focused on the retail health market segment and had retail health GWP of Rs 8215.09 crore and Rs 8215.09 crore in FY21 and H1FY22 2021, respectively.
The solvency ratio has to be maintained at 1.50x as per the IRDAI regulations. The solvency ratio was 1.52x as of September 30, 2021.
The health insurance sector is subject to seasonal fluctuations in operating results and cash flow. The sale of health insurance products increases in the last quarter of each fiscal year to take advantage of income tax benefits available to customers. Hence, there is slower sequential revenue growth in the first quarter of each fiscal year. The investment income is also subject to fluctuations as the sales of investments are timed on the basis of market opportunities.
The product offerings include a range of flexible and comprehensive coverage options primarily for retail health, group health, personal accident, and overseas travel, which accounted for 87.9%, 10.5%, 1.6%, and 0.01%, respectively, of the total GWP in FY21 and 85.6%, 13.1%, 1.3%, and 0.0001%, respectively, of total GWP in H1FY22. The products target a variety of customer segments, including individuals, families, students, senior citizens, as well as persons with pre-existing medical conditions across the broader middle-market customer segment.
The products include family floater products in which the sum insured covers the entire family on the payment of a single annual premium; individual products, which are tailored to the needs of the individual; and specialized products, which focus on customers with pre-existing conditions after taking into account the associated risks.
The distribution network has grown to 779 health insurance branches spread across 25 states and 5 union territories in India as of 30 th Sept, 21. Other origination channels include distribution by direct online sales through telemarketing and our website, brokers, insurance marketing firms, and web aggregators.
Star Group has health insurance hospital networks in India, with 11,778 hospitals as of Sept 30, 2021. The issuer has pre-agreed arrangements with 7,741 hospitals till date. The Issuer processed 0.33 million and 0.25 million claims, respectively, or 55.0% and 62.0%, respectively, of the total number of cashless claims, through agreed network hospitals.

Financial Review of Star Health

The net premiums increased by 71.8% to Rs 4659.68 crore in H1FY22 from Rs 2712.17 crore in the previous quarter (Q1FY21). Income from investments was Rs 160 crore during H1FY22. The claims incurred increased by 151.5% to Rs 4110.99 crore in Q1 FY22. There was an operating loss of Rs 661.66 crore for Q1 FY22.

The net premium increased by 7% to Rs 4692.99 crore in FY21 from Rs 5022.82 crore in FY20. The claims incurred increased by 41.50% in FY21 as compared to Rs 3087.43 crore in FY20. This was due to the increase in claims incurred due to the pandemic. Income from investments was Rs 163.11crore. Operating losses for FY21 were Rs 1071.21 crore against the profits of Rs 360.78 crore in FY20. This decrease was primarily due to the exceptional expenses incurred in connection with the discontinuance of the VQST reinsurance treaty and the impact of COVID-19 claims paid in FY21.

Table 1 - Financials and Ratios (Amount in Rs Crore)
Title	H1FY22	FY2021	FY2020	FY2019
Net Premium	4659.68	5022.82	4692.99	3579.51
Operating profit	-661.66	-1071.21	360.78	164.72
Income from investment	160.08	163.11	101.15	61.42
Other Income	6.89	0.32	0.03	0.10
Claims incurred	4110.99	4369.45	3087.43	2297.59
Commission	626.19	583.78	340.90	263.77
Total Assets	1,493.96	3,144.02	1,588.19	1,602.30
Cash Flow from operating activities	-82.18	890.38	647.42	776.41

Valuation and Peer Comparison

The P/E of the Issuer is not ascertainable as the EPS is negative for the last two fiscals. The Issue is priced at 15.56x at NAV of Rs 57.83 per share as at the end of H1FY22, calculated at the upper price band of Rs 900 per share. The peers of the Issuer are ICICI Lombard, New India assurance as per the RHP. The peer comparison table is given below.

Table 2 - Star Health valuation and peers comparison
Particulars	ICICI Lombard	New India Assurance	Star Health
Face value per share	10	5	10
Net profit for FY 21 (Cr)	1,473.05	1,627.75	-825.58
EPS	32.41	9.95	-16.54
NAV per share	163.56	112.17	63.58
Return on net worth	19.81%	8.81%	-23.69%
P/E	46.66	15.3	NA

Sector Outlook

The Indian health insurance sector is underpenetrated with penetration of only 0.36% of GDP in 2019, compared to the global average of approximately 2.0% of GDP. Demographic factors, including increasing life expectancy and population growth in India, as well as the high portion of out-of-pocket expenses are driving the need and growth of healthcare services. The rising cost of medical care in private hospitals, measures taken by govt. of India and the pandemic has resulted in raising awareness of health insurance in India.

Issue Snapshot

Star Health and Allied Insurance IPO open on 30 Nov amounting to Rs 7249.18 crore (fresh issue Rs 2000 crore) with a price band of Rs 870-900 per share. The Fresh Issue proceeds would be used to augment the Issuer’s capital base and maintain solvency levels. The retail quota for the IPO is 10% and the Issue closes on Dec 2, 2021.

Conclusion and Investment Strategy

Star Health insurance has a 31.3% retail health insurance market share in FY21 and has the largest number of individual agents.The Issuer’s financial profile has weakened in the last two fiscals due to higher claims incurred in the pandemic. The increase in net paid claims due to the COVID-19 accounted for 30.0% and 41% of the total net paid claims by value in FY21 and H1FY22.

The Issuer faces intense competition in the Indian health insurance market from both public and private-sector competitors. Major public-sector non-life insurers are New India Assurance ,United India Insurance National Insurance and Oriental Insurance. Major private-sector non-life insurers are ICICI Lombard, HDFC Ergo, TATA AIG, Bajaj Allianz and other Standalone Health Insurers are Care Health Insurance, Manipal Cigna Health Insurance, Aditya Birla Health Insurance and Max Bupa Health Insurance. Considering the weak financials, the prevalence of competitive public and private players, one may avoid this IPO.

Reviewer recommends Avoid to the issue.

Review By CA Priyanka Choudhary on 23rd Nov 2021

Review Author

About CA Priyanka Choudhary

CA Priyanka Choudhary, a freelance chartered accountant

Priyanka Choudhary Jain is a Chartered Accountant and an experienced credit analyst. She has worked with CRISIL as Senior Credit Analyst on ratings assignments including business and financial analysis in Corporates as well as the Public Finance Sector.

Email: [email protected]

DISCLAIMER: No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor prior to making any actual investment decisions, based on information published here. Any reader taking decisions based on any information published here does so entirely at own risk. Investors should bear in mind that any investment in stock markets are subject to unpredictable market related risks. Above information is based on RHP and other documents available as of date coupled with market perception. Author has no plans to invest in this offer.