by Welcome back to Traders Ideology, there is an interesting IPO in the market. In this article, we will do a fundamental analysis of Tega Industries Limited, where we will discuss the business of the company, its promoters, its future growth prospects, key risk, and financials.
Then we will look at the IPO details along with the valuation of the company. Finally, we will conclude if it is worth investing in star health or not. Alright, let’s get started.
Disclaimer: This article is only for educational purposes. I do not recommend buying or sell so please consult your advisor and do your own research before investing.
Also, Read: Fundamental Analysis of IRCTC & Fundamental Analysis of DMART
Fundamental Analysis of Star Health
Fundamental Analysis of Star Health are as follows:
Company Overview
- Established in 2006, Star Health and Allied Insurance Company Ltd is in the business of health insurance and is consistently the largest health insurance provider in India in the private sector in the last three years with a current market share of 15.8% in the Indian health insurance in FY 21.
- If you look at some of the data points in FY 21, Star Health has insured 20.5 million people that is around 2 crore people with a total GWP (Gross written premium) of Rs 9,348.9 crore.
- It operates in both retail health and group health insurance category. In FY 21 Retail Segment contributed 89.3% in total GWP and Group Insurance contributed 10.7% in total gross written premium.
- The company has a wide network of 4.6 lakh health insurance agents with 737 health insurance branches across the country by FY 21.
- Star Health also has a very large hospital network of 11,000+ hospitals out of which it has pre-agreed arrangements with 7000+ hospitals that also provide cashless facilities.
Promoter and Leadership
- If you look at the promoters of Star Health and Allied Insurance Company Ltd (Star Health), it has 3 founders, your V. Jagannathan, Anand Shankar Roy, and Dr. Subbarayan Prakash.
- V. Jagannathan is the Chairman and CEO and has over 47 years of experience in the health insurance industry. Prior to founding Star Health, he served as United India insurance company’s Chairman and Managing Director and is also serving on IRDAI Advisory Council, then Dr. Subbarayan Prakash is the Managing Director and has wide experience in the health insurance industry and prior to founding Star Health, he was a practicing general surgeon.
- Mr. Anand Shankar Roy is also the Managing Director and is an expert in the health insurance business with over 21 years of experience in the health, non-life insurance, and banking sector and manages sales distribution and marketing.
- The company has a comprehensive strength of strong distribution, a large hospital network, a reputed brand name, and the largest private health insurance company in India.
- On top of this, the management is looking very experienced. Now, as far as competition is concerned, Star Health has strong competition from various companies, including HDFC Ergo, New India Assurance, Max Bupa, Bajaj Alliance, ICICI Lombard, Tata AIG, Aditya Birla health, Cholamandalam, Reliance general, and so on.
- Even the New Age FinTech and InsurTech companies have entered the health insurance business. So there is intense competition in the health insurance space.
Key Risk
- If you look at the key risk COVID has significantly affected their business. Due to COVID, there was a significant increase in the claims and that has badly impacted the profitability of the company.
- Although COVID has also resulted in increased awareness for health insurance, any such calamity in the future poses a significant risk for the company.
- Moreover, a company’s product pricing significantly depends upon models to predict claim expenses and their frequency.
- Any failure to accurately estimate the incurred medical expenses or frequency of claim could impact the profitability of the company.
Future Growth Prospects
- If you look at the future growth, health insurance sector in India is highly under-penetrated.
- Many people do not have health insurance, and those who have insurance either do not cover their entire family or take a very small amount of health insurance.
- However, COVID has been an eye-opener for people and especially the young generation has now realized the importance of health insurance.
- On top of this, due to rising health care expenses. Health insurance is a must for every individual. Just to give you an idea, India’s health insurance penetration as a percentage of GDP is just 0.4% in FY 19, whereas US health insurance penetration as a percentage of GDP is 4.1%.
- There’s a huge gap as compared to developed countries. As per research from Crizal, the retail health insurance sector in India is expected to grow at a CAGR of 23% between 2021 and 2025.
- Star Health has been growing at a fast rate between FY 19 and FY 21.
- The retail health gross written premium grew at a CAGR of 32.5%. So key growth drivers for the health insurance sector would be increasing awareness towards health insurance, rising income level to access quality health care, then increasing life expectancy and government focus on improving health care.
- Although I believe that going forward digital would be a key differentiator in terms of optimizing the business process as compared to a pure-play agent network.
Financials of Star Health
The financials of Star Health are as follows:
Revenue
- If you look at the revenues of the company Star Health’s Gross Written Premium has grown from 5413 crores in FY 19 to 9348 crore in FY 21, at a CAGR of 20%.
Net Profit
- Its profits have increased from 128 crore in FY 19 to 268 crore in FY 20 but due to COVID, the profit fell down in FY 21 to -825 crore.
- In fact, the company has posted an H1 result and has made a loss of 380 Crore.
ROE
- If you look at the ROE in FY 20 before COVID, it had an ROE of 16.46% but due to COVID in FY 21, It’s ROE became -23.69%.
Debt to equity ratio
- The company has negligible debt to equity of 0.07.
Pros and Cons
Before investing in star health, we should check its pros and cons. Pros and Cons are as follows:
Pros
- Let us check a few positive aspects of Star Health which we should see.
- First, Start Health has a 16% market share in the health insurance space. The largest player in this industry, govt player New India Assurance, has a market share of 18%. This means it’s not far from New India AssuranceBecause of its private health insurance nature, the group opportunities are huge.
- The next point to check is their network hospital. The company has a large network of partner hospitals in India. This means that they can negotiate with the prices and also reduce them which is a big advantage.
- The third biggest strength of the company which I feel is very important is its singular focus on health insurance alone. They do not focus on general health insurance but only health insurance. It can be beneficial if you see general insurance co. or PSU, then a private singular health insurance co.’s growth opportunities are huge.
- The next is the growth of the industry in itself. By 2025, it is expected to grow 73 million customers in the health insurance space compared to 43 million in 2020.
Cons
- Now, let’s understand the negative points of Star Health insurance.
- First, the insurance industry is very heavily regulated and any sudden change in these regulations can be detrimental to the company’s operations.
- Second, there isn’t any concept of intellectual property protection for insurance products so the new product is replicated by others.
- Third, if Covid like scenarios appear, and claim rates increase, then a company’s growth may get hampered. Lastly, Health insurance is a much more difficult product to sell as compared to life insurance.
- You get a return in the life insurance policy its duration then psychologically you feel you are getting back your money. But health insurance does not have any such thing so it’s a very difficult product to sell.
Star Health IPO Details
The Star Health window is between 30th November to 2nd December 2021, its IPO price band is between Rs 870-900, the shares are available at a face value of Rs 10, and the lot size is 16 shares. So, the total investment for one lot would be Rs 14,400, the issue size is Rs 7,249 crores out of this there is fresh equity of Rs 2,000 crore and the remaining Rs 5,249 crore is Offered for Sale where promoters are diluting their stakes.
So, promoters are diluting a very small amount of their shareholding, this 474 Crore raised from the IPO would be used to fund the inorganic growth initiative, fund the working capital requirement of the company, invest in the subsidiaries to augment their capital base, and general corporate expenses.
In terms of market cap at a price band of Rs 197 company would be valued somewhere around 3800 crores. So, it would be a small-cap company.
The majority of money is going into the promoter’s pocket, this Rs 2000 Crore raised from the IPO would be used to increase the capital base and maintain solvency levels. So, there is minimum solvency of 1.5 from IRDI, and Star Health has a solvency of 2.23, which is comfortable.
Valuation
At an upper price band of Rs 900, Star Health is launching the IPO at a total valuation of 54,600 crores. Now, since the last 18 months, the earnings were negative, so we can’t calculate the PE ratio.
If you look at the listed peers, there is no single company in pure-play health insurance in India. So, we can’t do the comparison, but the 54,600 Crore valuation looks very stressed, especially when the company has been at a loss for the last 18 months.
Conclusion
There is no doubt that the future growth prospect of the health insurance sector in India is bright, on account of rising awareness towards health insurance, rising healthcare costs, the need for quality healthcare, and increasing life expectancy.
Star Health has been the leader in the private health insurance sector with a strong brand name, strong distribution, and experience management.
Clearly, Star Health is looking fundamentally strong. Although the company has made losses in the last 18 months due to a surge in claims because of COVID. But this is also created more awareness towards health insurance and the company’s gross written premium is increasing at a good rate.
However, Star Health has strong competition from both private and public insurance companies in India. Finally, the valuation at which the company is launching its IPO is looking stretched at 54,600 crores. Even if you look at the grey market, there is hardly any premium on this.
So I don’t expect a good listing for this IPO. Moreover, considering the fact that the Indian stock market is in correction mode, it can also negatively impact this IPO listing. Having said this, you can certainly keep an eye on this stock post listing and consider buying when it is available at a better valuation in the future. But for now, I would avoid this IPO. Now, what is your take on this IPO? Let me know in the comments.
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