Brokerages give thumbs up to Rakesh Jhunjhunwala-backed Star Health's IPO

Say it stands to benefit as market leader in health space, but risk of fresh Covid wave may weigh on profitability

Rakesh Jhunjhunwala-backed Star Health & Allied Insurance’s initial public offering (IPO) opened for subscription on Tuesday. The insurer is looking to raise up to Rs 7,250 crore, making it the third largest IPO of the year, and the eighth biggest ever to hit the domestic market.

With a market share of about 16 per cent in the domestic health insurance space, Star Health is the largest health insurer in the country. It has set a price band of Rs 870-900 per share for its IPO. At the top end, the company will be valued at Rs 51,806 crore.

The offer consists of Rs 2,000 crore of fresh issue, which it will use to shore up its capital base, and an offer-for-sale (OFS) of Rs 5,250 crore by existing shareholders. The company raised Rs 3,217 crore from 62 anchor investors at the upper end of the price band of Rs 900 per share.

It also has a well spread agency network, a diversified product mix, and strong risk management focus. Besides, it has an in-house claims management system and medical expertise. Star Health has an extensive hospital network that includes 11,778 hospitals.

Star has also consistently delivered strong operating performance. As of March 31, it had the largest number of individual agents among standalone health insurers (SAHI).

Taking this into consideration, Angel Broking has recommended “subscribe” from a long-term perspective. “The valuations commanded by Star Health at Rs 5.5x FY21 market cap/gross written premium, are in line with recent deals in the standalone health insurance space and appear fair considering its positioning,” the brokerage said.  Among the positives is the company’s distribution networks, and diversified product suite. But, if the Covid risk intensifies, the brokerage says, it might increase the claim pressures on the company.

Choice Broking, meanwhile, has assigned a “subscribe with caution” rating. “The peers considered for benchmarking the valuation operate in the general insurance market and health insurance is one of their various offerings. Thus, these can be considered as proxy peers. At a higher price band of Rs 900, Star Health is demanding a market capitalisation-to-net premium earned multiple of 10.3x, which is at premium to the peer average. Moreover, the demanded valuations are at elevated premium to recent capital issuance,” the brokerage said.

Since the pandemic’s outbreak, the macros of the health segment have been positive. And with Star Health being mostly a retail player, it is well placed to benefit from the expansion of the market. But, the risk of a future wave may weigh on profitability.

The brokerage Nirmal Bang has assigned a “subscribe” rating from a long-term perspective. It views the company’s valuation, at 8.2x September book value, favourably in comparison with similar levels for ICICI Lombard, the largest private sector non-life insurer, because it expects Star Health to continue to grow at much higher rates while maintaining decent return on equity (RoE) in the post-Covid era.

KRChoksey Shares and Securities, too, has a “subscribe” rating. Given the growth prospects for the retail health insurance sector and the company’s market leading position, its current valuation looks reasonable, the brokerage said. With health insurance penetration being very low, and healthcare costs rising, customers will be compelled to buy health insurance. “We expect the company to maintain its strong growth momentum by increasing its market share and focusing more on underwriting quality,” it said.

Arihant Capital has recommended “subscribe for long term”. It said, at the upper end of the price band (Rs 900), the issue is valued at a price-to-book-value multiple of 14.2x based on its FY21 book value per share of Rs 64. “The company has a better track record than its peers in the health insurance industry, led by a higher share of retail health in its product mix versus the industry, a higher focus on SMEs in the group health segment, and better agent productivity,” the brokerage said.