Why Rakesh Jhunjhunwala-backed Star Health's IPO failed to enthuse investors

#IPO, #Rakesh Jhunjhunwala, #Star Health, initial public offering, was subscribed only 79 percent overall

Star Health IPO | Promoter Rakesh Jhunjhunwala is the second largest shareholder in the company.

It had all the makings of a star initial public offering – the backing of a famed investor, a dominating presence in an under-penetrated market, leading industry growth and “subscribe” recommendations from brokerage houses.

Yet, the Rakesh Jhunjhunwala-backed Star Health and Allied Insurance Company’s public offer was subscribed only 79 percent overall, garnering bids for 35.6 million shares against 44.9 million offered.

The issue barely scraped through after qualified institutional buyers subscribed to 1.03 times the portion set aside for them. As per regulations, at least 90 percent of this segment has to be subscribed.

Also read: Green Portfolio comfortable with Rs 45,000-48,000 crore valuation for Star Health, not Rs 52,000 crore

The retail portion was subscribed 1.1 times, but non-institutional investors and employees stayed away from the offer, with their portions subscribed only 19 percent and 10 percent, respectively. Employees did not subscribe even with a discount of Rs 80 per share.

The response was tepid even after the stock exchanges extended the cut-off for submitting bids to 7 pm on December 2, the closing day of the IPO.

Money for promoters

The offer for sale portion of the Rs 7,250 crore IPO alone was about Rs 4,400 crore.

“Literally 60 percent of the money raised would go back to the promoters and not be reinvested into the company. This made the potential investor base sceptical about the real reason for raising funds and their utilisation,” said Sonam Srivastava, founder of Wright Research, an investment advisory firm in Mumbai.

So, is that what went wrong? After all, Star Health is the first and the largest standalone health insurance company in the country with a market share of almost 16 percent as of FY21. Plus, experts were of the view that because Jhunjhunwala did not divest any of his stake in the company, it would boost investor interest, which did not happen.

Also read: Daily Voice | Don’t expect massive listing gains in Star Health IPO

Analysts said the reasons are varied. Besides expensive valuations and recent losses reported by the company, some said investors likely avoided the IPO to wait for more lucrative options, among them, the largest IPO expected soon from Life Insurance Corp. of India. Moreover, the recent Paytm debacle may have made investors cautious, analysts said.

“Institutional investors have already raised questions about expensive valuation,” said Satish Kumar, a research analyst at Choice Broking.

Shares offered were priced at Rs 870-900 each, more than five times what Jhunjhunwala paid for his almost 15 percent stake at an average of Rs 156 per share.

“The valuation was expensive with a price-to-book ratio of 14.15 as Star Health valued itself based on gross premium earned. The company should be valued based on its capacity to assess risk, which is essentially profit, and not on premiums being collected,” said Srivastava of Wright Research. “Meanwhile, its peer ICICI Lombard trades at a price-to-book ratio of 8.25 times.”

Star Health posted a loss of Rs 825.58 crore in FY21 on a negative total income of Rs 907.77 crore due to increased claims during the pandemic. In FY20, profit stood at Rs 268 crore on total income of Rs 461.96 crore.

“The company’s profitability was severely impacted in FY21 due to higher claims arising due to the Covid-19 pandemic. Thereby, domestic mutual funds largely remained away from subscribing,” Kumar said.

Also read: LIC invites its policyholders to become shareholders by updating PAN and demat details

“The excessive valuation did not take into account the recent losses and expected losses in the near future. However, investors wanted the price to factor in the uncertainty regarding continuous high claims related to Covid-19,” said Abhay Agarwal, founder of Piper Serica Advisors.

Competition

He added that growing competition, with five companies already in the standalone health insurance space, may have also dented sentiment. About 25 public and private general insurers also offer health insurance.

“Price-shopping by customers to choose the cheapest insurance provider limits the profitability of the business,” Agarwal said.

“We are seeing highly competitive pricing in the market because new general insurance companies are offering better health insurance policies,” said Prashanth Tapse, VP of research at Mehta Equities.

That leads to low bottom line margins, raising questions over the company’s business health in the short term, Tapse added.

Also read: After record fundraising in November, 8-10 IPOs expected this month

It also did not help that the stock market was going through a volatile week, driven by persistent selling by foreign institutional investors.

“The recent poor listing of Paytm has made investors very cautious about investing in large IPOs of loss-making companies, especially those that are in a very competitive business environment. Plus, there is a busy IPO calendar for the next couple of months providing enough opportunities to investors,” said Agarwal.

Besides LIC, Byju’s, Ola, MobiKwik, Delhivery, GoFirst, Adani Wilmar, VLCC, Gemini Edibles, and CMS Info Systems are among the public offerings lined up for the next few months.
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