Star Health IPO: How good is it?

In our story, Star Health IPO: Information analysis, we have shared the key details of the IPO, along with important information about the company. Here we will answer some questions about Star Health and evaluate it on parameters like management, financials, valuations, etc.

IPO questions

The company/business

1) Are the company's earnings before tax more than Rs 50 crore in the last 12 months?
No, the company incurred a loss of Rs 826 crore in FY21.

2) Will the company be able to scale up its business?
Yes, the company has been opening new branches all over the country and also employing new agents, which resulted in an increase in net premium earned. As the company aims to open more offices, it will be able to scale up its business.

3) Does the company have recognisable brands truly valued by its customers?
Yes. Star Health is India's leading private health insurer in the retail market where brand recognition is of utmost importance. It has maintained this leadership position in the last three fiscal years.

4) Does the company have high repeat customer usage?
Yes, the company is able to retain its customer, with its renewal premium ratio for FY21 pegged at 97.9 per cent.

5) Does the company have a credible moat?
No, even though the company is a leader, it does not offer anything unique that others cannot offer.

6) Is the company sufficiently robust to major regulatory or geopolitical risks?
Yes, its operations are based only in India and the company has adhered to all the provisions related to regulations.

7) Is the business of the company immune from easy replication by new players?
Yes. The insurance industry is highly regulated and requires various permissions to enter. New players cannot replicate and claim the leadership position from the company.

8) Is the company's product able to withstand being easily substituted or outdated?
Yes. The health-insurance industry is under-penetrated. With the growing awareness of health insurance in the post-COVID era, the demand will only increase.

9) Are the customers of the company devoid of significant bargaining power?
Yes. Customers are mainly individuals so they do not have any bargaining power.

10) Are the suppliers of the company devoid of significant bargaining power?
Not applicable. This is not applicable to the insurance industry.

11) Is the level of competition the company faces relatively low?
No, the company has various competitors in the industry both in the overall and standalone health-insurance segments.

Management

12) Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
Yes. The main promoter company, Safecorp Investments, would continue to hold a 40.6 per cent stake post issue.

13) Do the top three managers have more than 15 years of combined leadership at the company?
Yes. The top three managers have more than 15 years of combined experience and the managing director Mr Anand Roy has been with the company since its inception.

14) Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
Yes, we have no reason to believe otherwise.

15) Is the company free of litigation in court or with the regulator that casts doubts on the management's intention?
Yes. The company has 56 litigations against it, including 48 awards from the insurance ombudsman against them. But it does not cast doubt on the management's intention.

16) Is the company's accounting policy stable?
Yes, we have no reason to believe otherwise.

17) Is the company free of promoter pledging of its shares?
Yes. Promoters have not pledged any of their shares.

Financials

18) Did the company generate a current and three-year average return on equity of more than 15 per cent and return on capital employed of more than 18 per cent?
No. The company has posted the operating and net loss for FY21. So, it has a negative return on equity and return on capital employed. The three-year average return on equity is 1.1 per cent and the return on capital employed is 1.4 per cent. We would like to mention that this drastic decrease in these numbers is due to the huge loss posted by the company for FY21, owing to the pandemic.

19) Was the company's operating cash flow positive during the last three years?
Yes, the company has posted positive operating cash flow during the last three years. However, we would like to mention that it has posted a negative operating cash flow during the half-year ended FY22.

20) Did the company increase its premium earned by 10 per cent CAGR in the last three years?
Yes. The company managed to increase its net premiums earned by 18 per cent CAGR in the last three years.

21) Is the company's net debt-to-equity ratio less than one or is its interest-coverage ratio more than two?
Yes. The company has a debt-to-equity ratio of 0.15 as on September 30, 2021. As the company posted an operating loss in FY21, it has a negative interest-coverage ratio. However, in FY20, the company had an interest-coverage ratio of 17 times.

22) Is the company free from reliance on huge working capital for day-to-day affairs?
Yes. The company does not require huge working capital. As it collects the premiums upfront, it will be able to manage its day-to-day expenses easily.

23) Can the company run its business without relying on external funding in the next three years?
Yes. As the company has already raised capital through the issue of non-convertible debentures and will raise money in this IPO, it will not require any external funding.

24) Have the company's short-term borrowings remained stable or declined (not increased by greater than 15 per cent)?
Yes. The company does not have any short-term borrowings.

25) Is the company free from meaningful contingent liabilities?
Yes. The company does not have any meaningful contingent liabilities as on September 30, 2021.

Stock/valuations

26) Does the stock offer an operating-earnings yield of more than 8 per cent on its enterprise value?
No. The company has posted an operating loss for the period.

27) Is the stock's price-to-earnings less than its peers' median level?
No. The company posted a loss for FY21 and in the last 12 months. The peers' average level of price to earnings is 40.5 times.

28) Is the stock's price-to-book value less than its peers' average level?
No. The company will trade at a P/B of 9.9 times as compared to peers' average level of 4.8 times.

Also read Star Health IPO: Information analysis to learn about the key IPO details and important information about the company.

Disclaimer: The authors may be an applicant in this Initial Public Offering.