Wright Research founder Sonam Srivastava said the Indian health insurance market is underpenetrated and retail health insurance is the fastest growing and most favourable sub-segment. “Star Health and Allied Insurance is the leader in that segment which makes its fundamental prospects quite attractive,” he said of the insurer whose initial public offering (IPO) opens on November 30.
While the long-term outlook for Star Health is good like Paytm, listing might not be a dream run as the grey market premium clearly shows, Srivastava, a quantitative investment management and trading professional, said in an interview to Moneycontrol. Edited excerpts:
Should one go in for the Star Health IPO in the current scenario?
While the market crash after the new Covid strain will be harmful to IPO prospects, the healthcare industry, on the other hand, will come back in favour. So this listing of India's largest private health insurer is an interesting one. The pandemic increases the market for health insurers but the claims also go up, growing losses.
The grey market premium for Star Health has been falling rapidly from Rs 70 to Rs 20-30, and with a price to book ratio of 14.15, which is on the expensive side, investors should remain careful of this issue.
Do you think the issue is priced right considering the prevailing market conditions and a disappointing Paytm listing?
The Paytm IPO has given a clear indication that Indian investors don’t like overpriced large issues. The company (Star Health) is raising more than Rs 7,000 crore from the market, making it the third largest IPO of the year. However, the pricing seems expensive, given that it is also loss-making due to rising insurance claims in the last year.
Nevertheless, Star Health does have fascinating prospects being the most significant player in the retail health insurance segment, with excellent distribution and good products. Still, the mood of the market is not favourable for giving high values for good prospects.
What are the risks one should consider before subscribing to the IPO?
IPOs are favourably priced in bullish markets and conservatively in volatile markets. This is especially true for IPOs that have rich valuations. So while the company has good long-term prospects like Paytm, the listing might not be dreamy as the grey market premium clearly shows.
From the health insurance business point of view, the company is placed perfectly in the retail segment, driving long-term growth. Still, if pandemic impacts escalate, claims will go up for Star Health like last year, which led to it reporting net losses.
Do you think the name of ace investor Rakesh Jhunjhunwala as a promoter will help the issue get a robust subscription, or will the current market environment impact subscription figures? What are the subscription levels you are looking at?
Rakesh Jhunjhunwala is the most celebrated investor in India, especially among retail, and lots of people jump on any stock that he picks. The company has a clear advantage with that, and that messaging has been front and centre for this IPO.
If the market rebounds by the subscription and listing date, we could see good interest riding on the Rakesh Jhunjhunwala euphoria. Still, if needs are in a bad way, there will be negative attention on “bull investors”.
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What are your thoughts on Star Health’s financials reported so far?
Star Health posted a loss of Rs 825.58 crore in FY21 on a negative total income of Rs 907.77 crore. Profit in FY20 was at Rs 268 crore on total income of Rs 461.96 crore. The combined ratio used to value insurance companies has been stable historically but escalated last year due to increased claims. The solvency ratio remains strong. The company has seen the market grow during the pandemic, but the claims also stack up during difficult times.
The Indian health insurance market is underpenetrated, and retail health insurance is the fastest growing and most favourable sub-segment. Star Health is the leader in that segment which makes its fundamental prospects quite attractive.Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.