Divam Sharma, cofounder of Green Portfolio, says profitability at Star Health and Allied Insurance Company, which closes its initial public offer on December 2, is still an issue but that is a temporary phenomenon. Profitability should return once “we are out of the pandemic,” he said in an interview to Moneycontrol.
Although Star Health deserves a premium, Green Portfolio would be more comfortable with a valuation of Rs 45,000-48,000 crore, said Sharma, who has over 15 years of experience in investment management.
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Q: Why should one go for the Star Health IPO in current equity market conditions? What is your advice to your investors?
Star Health is the largest pure-play health insurer in India, with a market share of 15.8 percent (as of FY21) and growing fast. It has compounded its gross written premium (GWP) by 36 percent over FY16-21, which is double of the industry growth rate of 18 percent. Additionally… Star Health focuses on the retail health business, which has higher profitability and higher growth potential due to under-penetration.
Although the company did face losses due to higher claims due to Covid in FY21, we believe Star Health is one of the best franchises in the health insurance space and has the ability to deliver 18-20 percent return on equity, led by a combined ratio of 94-95 percent (combined ratio is a measure of profitability used by an insurance company and is calculated by taking the sum of incurred losses and expenses and dividing them by the premium earned) and investment leverage of 2.3x-2.5x.
We also like the management at Star Health and believe that they have done a fabulous job of scaling the business through insurance agents and hence advise our investors to invest in the company for the long term. The valuations commanded by Star Health at around 5.5x FY21 market cap/GWP are in-line with recent deals in the SAHI (standalone health insurance) space and appear fair, considering its market-leading positioning.
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Q: Do you think the issue is rightly priced considering the current equity market environment and the disappointing Paytm listing?
At the upper price band of Rs 900, the company is valued at Rs 51,806 crore (~5.5x FY21 m-cap/GWP and 14.15x its book value). We believe that the company deserves a premium given its high growth rate, higher share of retail health insurance and excellent distribution network led by agents. That being said, we would be more comfortable around the Rs 45,000-48,000 crore range. Nonetheless, we advise investors to invest for the long term and average their positions whenever they see a dip in the share price.
Click Here to read Moneycontrol's Exclusive Research Note on Star Health IPO
Q: What are the risks/concerns one should consider before subscribing to Star Health IPO?
Pandemics such as the recent coronavirus and other catastrophic events such as natural disasters can trigger large claims by policyholders, resulting in losses in investment portfolio and deterioration in the financial condition of the company. These are one-off events that are difficult to predict otherwise.
Q: What could be the subscription levels you are looking at?
We believe the subscription should sail through comfortably with high interest from the investor community.
Q: What are your thoughts on Star Health financials reported so far?
Profitability is still an issue but we believe that is a temporary phenomenon. The encouraging thing is that the company grew its GWP from Rs 3,976 crore in Q1FY21 to Rs 5,070 crore in Q1FY22. If we were to annualise this, we are looking at doubling the GWP from FY21 levels. Once we are out of the pandemic, we should also see profitability come back.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.