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Should investors go for Star Health and Allied Insurance IPO?

Star Health and Allied Insurance, a specialized health insurance originator backed by Rakesh Jhunjhunwala and Westbridge Capital, was set up in the year 2005. It started off with solid credentials, floated by the former CMD of United India Assurance, V Jagannathan. Today, Star Health has a dominant market share of 15.8%.

Star Health offers individual health cover, group cover, personal accident cover and overseas travel cover. The company derives 88% of revenues from retail health and about 10.5% from group health. It largely specializes in originating and selling floaters, which account for 81% of the total value of policies sold.

Data Source : Internet

Let us look at the structuring of the IPO and its break-up into fresh issue and OFS

  • Star Health promoters and early investors will tender 583.24 lakh shares as part of the offer for sale, which at upper band price of Rs.900 works out to Rs.5,249 crore.
  • Some of the key participants in the OFS are Apis Growth, University of Notre Dame and MIO Star Fund. Promoters, in total, will hive off 308 lakh shares in the OFS.
  • The fresh issue to public is 2.11 crore shares worth Rs.1,900 crore with Rs.100 crore of shares reserved for the employees of Star Health.

The big story is the rapid growth in the gross premiums written (GPW) over last 2 years. The negative EBITDA and the net loss is on account of a sharp spike in COVID related claims during 2020 and 2021. However, COVID-19 triggered a 28% growth in GWP in fiscal 2021 for health insurance sector overall with Star Health witnessing an impressive 35.7% growth.

For FY21, investment income was up 117% over FY19 at Rs.423 crore while GWP was up 73% over FY19 at Rs.9,349 crore. At the indicative listing market cap of Rs.51,806 crore, the Market Cap to GPW ratio works out to 5.54X, very reasonable with 15.8% market share.

Should investors go for Star Health and Allied Insurance?

Here is what investors must consider before investing in the Star Health IPO.

  • Health insurance penetration in India is 0.36% against global average of 2%. That is a huge wallet opportunity and Star’s proprietary distribution model can be a good fit.
  • EBITDA losses for FY21 are one-off and should subside fully post FY22. Meanwhile, use of fresh funds for capital buffers and solvency ratio will be value accretive.
  • Star Health brings solid credentials, promoted by for United India CMD V Jagannathan and backed by Rakesh Jhunjhunwala and Westbridge Capital.
  • Star Health’s market share at 15.8% leads the runner up UIA by 500 bps. Star Health is a big gainer from rising health consciousness and insurance awareness post-COVID.
  • Star Health has formidable delivery credentials with 11,778 network hospitals, 97.9% retail renewal premium ratio, 5.10 lakh individual agents and 94.1% claim processing in under 30 days.

The IPO of Star Health and Allied Insurance has been valued in the IPO at 5.54 times its GWP. That is a reasonable valuation for an outright industry leader. Insurance is a long haul game and investors would therefore be best advised to take a long term approach to the IPO.

Do you think the risk can be high due to the lag effect of COVID-19?
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The article is for informative purpose and does not suggest to buy or sell or hold. Decision or investing is to be taken by individuals.

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