IPO Size: Rs. 7,249 cr (75% for institutions, as loss in FY21)

• 72% is offer for sale (OFS): half by promoter fund Westbridge and half by other funds (MIO, Apis, University of Notre Dame, ROC Cap).
• 28% is fresh issue to augment solvency ratio to 2.5x, from present 1.5x

Price band: Rs. 870-900 per share

Mcap: Rs. 51,800 cr, implying 14% dilution

IPO Date: Tue 30^th Nov to Thu 2^nd Dec 2021, Listing 10^th Dec 2021

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Strengths:

1. Started in 2006, company has a dominant market share of 16% in the Indian health insurance industry and 31% on the more-profitable retail side (as lower claims over group health), grossing premium of Rs. 6,900 cr in FY20, Rs. 9,350 cr in FY21, which rose to Rs.5,100 cr in H1FY22.
2. With 5 lakh agents, Star Health has 2^nd highest individual agent network in India, behind LIC, with agency accounting for 80% of premium income.
3. Company is a pure-play health insurance company (no fire or marine, unlike general insurance) with better combined ratio, due to lower claims of about 65% over 80% for private insurers and ~100% for PSU general insurers, and hence more profitable. 

Concerns:

1. Pre-covid, company clocked PAT of Rs. 268 cr in FY20, but reported net loss of Rs. 826 cr and Rs. 380 cr in FY21 and H1FY22 respectively, as claims ratio increased to 88% from 65% pre-covid. Covid not only increased number of claims, but also doubled average claim amount to Rs. 90,000. Company is unlikely to be profitable in FY22, as 91% claim ratio of Q1FY22 remain elevated, since retail health insurance claims are a long tail.

Over a longer term, although awareness for health insurance is rising with a large market opportunity, a highly competitive market may keep a tab on margins.

2. Stretched Valuation: Even if company gets back to the black in FY23, with an extremely optimistic expectation of Rs. 500 cr PAT (double of FY20), PE multiple of 104x is extremely aggressive. Only listed private general insurer ICICI Lombard, with 25% of annual premium of Rs. 13,000 cr from health, growing at similar pace as Star (24% in H1FY22 against 17% industry growth), double-digit net margin even in covid period (over loss for Star in covid and mid-single digit net margin pre-covid), 21% RoE for both FY20 and FY21, dividend declared for FY22, is ruling at a PE multiple of only 39x.
3. While PE firm Westbridge and ace investor Rakesh Jhunjhunwala are classified as company promoters, they are essentially financial investors (different from start-up founders/entrepreneurs), and will, at some time, seek an exit on their investment, which has already been 3-4 years. Westbridge is already trimming 48% holding to 41% via the IPO.