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Why Star Health's IPO saw lackluster response from the market

Investors are concerned about the pricing of issues

ipo Representational image | Shutterstock

The insurance sector in India is underpenetrated and the general expectation is insurance companies will see strong growth in the coming years as life expectancy is increasing, healthcare costs are rising and the general awareness towards getting protected is also rising. 

Yet, the initial public offering of Star Health and Allied Insurance failed to garner a huge interest from the markets and just about managed to scrape through with 79 per cent subscription.  

Billionaire investor Rakesh Jhunjhunwala-backed Star Health’s Rs 7,250 crore public issue was the third-largest this year and came on the heels of the IPO of One 97 Communications, the parent company of fintech major Paytm.

The issue of Paytm was the largest to hit Indian markets at Rs 18,300 crore. While it was subscribed 1.89 times, its listing at a steep discount didn’t go down well among investors. Paytm shares traded at Rs 1,646.85 on Friday, which is a 23 per cent discount to its final issue price of Rs 2,150 a share. High valuation was blamed as one of the major reasons behind the disappointing debut of Paytm.

A few analysts had raised valuation concerns in the case of Star Health’s issue too; the price band for the issue was in the Rs 870 to 900 a share range. In contrast, according to various reports, Jhunjhunwala who held 14 per cent stake in the company, had acquired the shares at an average price of around Rs 156 a share. He didn’t sell his stake in the IPO.

“At higher price band of Rs 900, Star Health is demanding a market cap-to-net premium earned multiple of 10.3 times, which is at premium to peer average. Moreover, the demanded valuation is at an elevated premium to recent capital issuance,” Rajnath Yadav, research analyst at Choice Broking had said.

In comparison, the market cap-to-net premium earned multiple for ICICI Lombard General Insurance was at 7.3 times and that of state-owned The New India Assurance Company was at just 1.0 times, Yadav pointed in his IPO analysis.

Over the last 18-odd months, the stock markets have rallied sharply. That coupled with the easy money available in the system has driven a huge IPO rush. Till the end of November 2021, 52 companies have together raised Rs 1.10 lakh crore through public issues. This is way more than the Rs 26,613 crore raised by 15 companies in 2020. Even in 2019, which was a pre-pandemic year, only Rs 12,362 crore was raised through 16 IPOs, according to Prime Database.

In the backdrop of the Paytm issue, however, Star Health IPO’s failure to attract investors in huge numbers is perhaps a sign that investors are concerned about the pricing of issues and selecting accordingly.

The issue of Tega Industries, which was open for subscription between Dec 1 and Dec 3 got subscribed 180 times on the final day. The issue of Anand Rathi Wealth, which opened for subscription on Dec 2 and will close on Dec 6 was also subscribed 2.4 times as of Friday afternoon, data from NSE showed. 

Bid details for the Star Health IPO show that the retail portion was fully subscribed at 1.10 times. The portion reserved for qualified institutional buyers (QIB) also got subscribed although at just 1.03 times. However, non-institutional investors seem to have given it a miss; the portion reserved for them got only 0.19 times subscription.

Similarly, employees too seemed disinterested in picking up a share in their company. The portion reserved for employees got only 0.10 times subscription.

Cumulatively, with the issue subscribed 0.79 times (79 per cent), the issue made the cut. But, since it failed to hit the 100 per cent mark, the offer for sale portion (where existing investors sell portion of their shares) had to be reduced, for the offer to get over the line. 

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