December 13, 2021

Overlooked by IPO investors, Jhunjhunwala’s Star Health scores first ‘BUY’ rating

The Economic Times
NEW DELHI: The first-ever coverage on Star Health and Allied Insurance on Monday is filled with epithets such as “a pole star” and “unassailable”, which are entirely opposite of the market pessimism on the counter.
Analysts at Emkay Global have come out with a buy rating for Star Health, a couple of days after the listing on the bourses. They see up to 25 per cent potential upside in the counter by March 2023. They have a target of Rs 1,135. It closed at Rs 907 on Friday.
“We are of the view that investors should not be deterred by high valuations, which are rightfully anchored to Star Health’s early unassailable position in a high-growth industry,” says Avinash Singh, an analyst with Emkay Global, in a note with his co-author Shrishti Jagati.
Star Health is owned by Rakesh Jhunjhunwala and a consortium of investors such as Westbridge Capital.
The company was all but rejected by investors, especially high net-worth investors (HNIs), during the book building process. The initial public offering (IPO) of Star Health received 79 per cent subscription and the company was forced to cut down the size of the issue.
Its listing on the bourses was also disappointing. Shares of India's largest private health insurer were listed at Rs 845 on the National Stock Exchange and Rs 848.80 on the BSE, a discount of 6 per cent, compared with its issue price of Rs 900. It did see some buying after the listing.
Analysts say the Indian retail health insurance industry is still in its infancy and well-slated for a strong 20 per cent premium CAGR in the coming decades as penetration continues to improve from the current abysmal level of 12 per cent. An increase in sum assured to catch up with medical inflation, age- cohort pricing gains and re-pricing will likely account for half of the premium growth and Star Health is well placed to benet from this, they say.
“Star Health’s relative market share gap in the protable retail business is less appreciated. We estimate that this moat is tough to negotiate – calling for an upfront and disproportionate investment in agents and incentives, unfavourable terms to accelerate network of hospitals and, above all, destructive pricing to port existing or new customers,” says Singh.
Its 31 per cent share in retail health and 16 per cent share in overall health have come against established PSU behemoths and well-entrenched private multi-line insurers. If at all, future execution risks are lower with size and scale on its back, he adds.
Emkay analysts arrived at the target using future profit discounting. They expect net profits to rise to Rs 1,410 crore in FY25 from Rs 740 crore in FY23. They estimate a 12 per cent cost of equity, steady-state combined ratio of 94.3 per cent from FY26, and terminal growth rate of 7.5 per cent for profits. 
Among key risks are any further damaging wave of Covid-19 and regulatory risks. However, there is little possibility of any adverse regulatory development in the near to medium term, Emkay adds.