Abhay Agarwal, founder and fund manager of Piper Serica Advisors, says the valuation of the Star Health and Allied Insurance Company initial public offering is quite expensive considering the current market environment and what happened with the Paytm listing. There is nothing in it for short-term investors looking to make quick returns, he told Moneycontrol in an interview.
The Rs 7,249.18 crore IPO will sail through, but may not garner blockbuster subscription numbers, said Agarwal, who has almost three decades of experience in the equity stock markets. Edited excerpts:
Why should one go for the Star Health IPO in the current equity market conditions? What is your advice to your investors?
Star Health is the leader in the high-growth, standalone, health insurance space. While it has the ingredients for long-term growth of the sector and the company, the near-term risks outweigh the long-term opportunities. Despite that, the IPO is priced beyond reasonable levels and underplays all risks, especially uncertainties of a third wave leading to underwriting losses in the business for the foreseeable future. Reinsurance rates are expected to go up. We would advise waiting for a better entry point post-listing.
Do you think the issue is rightly priced considering the current equity market environment and the disappointing Paytm listing?
The issue price reflects unabated and irrational exuberance of the IPO market. The valuations are quite expensive considering what happened with the Paytm listing and the current market environment. On a comparative basis as well as on a standalone basis, the valuation of the IPO is quite expensive and there is nothing in it for short-term investors looking to make a quick return.
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What are the risks/concerns one should consider before subscribing to the Star Health IPO?
The company has guided for continued losses in the near term due to elevated claims. Unlike general insurers, Star Health is a standalone health insurer and does not have any other unit that would help cover for the rise in health claims. The risks of an adverse Covid wave emerging from a recent new strain of the virus, a general risk-off environment, rising competitive intensity from other insurers – more specifically from digital insurers like Acko and Digit – should be considered before deciding to subscribe.
Do you think the name of ace investor Rakesh Jhunjhunwala as a promoter of the company will help the issue get strong subscription or will the current market environment impact subscription figures? What could be the subscription levels you are looking at?
While celebrity investor names excite the retail market to some extent, in today’s age of information, investors are smart and will make a very informed decision. With the expected long-term growth in the business and the industry, the IPO will sail through, but considering the size and the valuation, we do not feel it will garner blockbuster subscription numbers. While it is difficult to estimate precise subscription numbers till the last day, as of now, there is no great interest from HNI (high net worth individual) investors. But that may change based on the secondary market movements and anchor book subscription.
What are your thoughts on Star Health financials reported so far?
Star Health has reported strong growth in gross written premium over the last five years. It scores very high on our proprietary Porter Model that thoroughly tests the competitive strength of a company. Being the first mover has helped it garner a sizable market share and create a large agent ecosystem. While the growth in premium has been strong and the company has managed to tightly control its costs, the claims have been much higher in recent times due to Covid infection. We believe Star Health’s profitability will continue to be under pressure for next one year.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 making any investment decisions.