Presenting distorted facts, hiding past associations, allowing `floating promoters’ to gain control at cheap valuation, steep-pricing despite loss-making operations, etc. make mockery of Capital Issue Control in the country. Whose interests are the regulators serving – scheming promoters or gullible investors?    

Would anyone have ever thought that the so called Big Bull-associated IPO would lose more than 75% investment value within one year, or quote at less than 1% in a decade? That’s what precisely happened in the case of A2Z Maintenance (now known as A2Z Infra). Should this be not part of the `risk factors’ for the subsequent IPOs backed by the Big Bull? Also, why shouldn’t Sebi insist disclosing as a risk factor the penalties imposed by the regulator on the Big Bull for insider trading?

Should the investing public forget all the nefarious activities of the IPO promoters, if the crimes were committed three years earlier? Why restrict the time-frame for committing crimes in the so called disclosure era? If the investing public were to lose confidence in the Indian capital markets, the regulators will have to blame only themselves.    

 

STAR HEALTH OFFER AT A GLANCE
Offer Type	Book Built
Platform	Main Frame
Offer Size	Rs 7,249 Cr (8,05,46,447 equity shares)
Fresh Issue	Rs 2,000 Cr (2,22,22,222 equity shares)
Offer for Sale	5,83,24,225 equity shares (Rs 5249 Cr)
Face Value	Rs 10
Price Band	Rs 870–900
Mkt/Bid Lot	16 Nos.
Implied M-Cap	Rs 51,796 Cr
Implied Equity Cap	Rs 57.55 Cr
Free Float	41.7%
Lead Manager	Kotak Mahindra Cap, Axis Cap, BofA Sec, Citigroup Global, ICICI Sec, CLSA India, Credit Suisse Sec, Jefferies India, Ambit, Dam Capital, IIFL Sec and SBI Cap
Registrar	KFin Technologies
Listing	BSE, NSE

 

INDICATIVE ISSUE SCHEDULE
Opening          : 30-Nov-2021	Closing      :  2-Dec-2021
Allotment        : 7-Dec-2021	Refunding :  8-Dec-2021
Demat Credit :  9-Dec-2021	Trading      : 10-Dec-2021

 

The Offer

Coming to the present IPO, claimed to have been promoted by Rakesh Jhunjhunwala, Safecrop Investments India LLP and WestBridge AIF I, the Chennai-based Star Health and Allied Insurance Company Ltd, is attempting to collect about Rs 7,249 Cr from the primary market.  The IPO is comprised of a fresh issue of Rs 2,000 Cr (2,22,22,222 equity shares) and an offer for sale of 5,83,24,225 equity shares (Rs 5249.18 Cr) from eleven existing shareholders, including the main promoter. The offer is being made through the book-building route with a price band of Rs 870-900 for Rs 10 paid-up share.

Applicants for the IPO should bid for a minimum lot of 16 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE & NSE on December 10, 2021. The issues is lead-managed by a dozen merchant bankers, namely Kotak Mahindra Capital, Axis Capital, BofA Securities, Citigroup Global, ICICI Securities, CLSA India, Credit Suisse, Jefferies India, Ambit, Dam Capital, IIFL Securities and SBI Capital. KFin Technologies is the registrar to the issue. The bidding opens on Tuesday, November 30 and closes on Thursday, December 2, 2021.

The company proposes to utilize the proceeds of the fresh issue (Rs 2000 Cr net of issue expenses) towards augmentation of capital base, expansion of business and improving solvency margin.

 

Lineage

The 2005-registered Star Health portrays the company’s chairman and CEO Venkatasamy Jagannathan as its founder. That is what the corporate presentation made for the promotion of the IPO reads.  The offer document claims that Rakesh Jhunjhunwala, Safecrop Investments India LLP and WestBridge AIF I are the promoters of the company. The IPO risk factor reads that the promoters are financial investors and became promoters only in fiscal 2019. It adds further that the promoters do not have adequate experience and have not actively participated in the business activities undertaken by the company. Strangely, the offer document is completely silent about the original promoters of the company.

According to knowledgeable sources, Star Health was originally founded by a Tamil entrepreneur Buhari Syed Abdur Rahman (15 October 1927 – 7 January 2015), who had a range of business interests in the UAE and Tamil Nadu. Rahman’s domestic company, East Coast Constructions, founded in 1962, reportedly built several landmarks in Chennai including Gemini Flyover, Kodambakkam Flyover, Chepauk Stadium, Chennai Citi Centre, Government General Hospital, Valluvar Kottam, the Marina Lighthouse and the Apollo Hospital complex. His joint venture with Al Ghurair was ETA Star Group – an investment company headquartered in Dubai.

While floating Star Health with the help of Oman Insurance Company, which invested Rs 10.5 Cr in 2006, Rahman roped in V Jagannathan who had considerable experience in the insurance industry. The original signatories to the MoA of Star Health were Syed M Salahuddin, Arif Buhary Rahman, Ahmed Syed Salahuddin, Hameed Syed Salahuddin, Mohamed Hassan, Abdul Qadir A Rahman Buhary (8300 shares each) and Venkatasamy Jagannathan (200 shares).

Industry sources vouch that Star Health’s business flourished during the previous DMK ruling in Tamil Nadu (2006-2010) as the company had the exclusive business of the DMK Government-sponsored insurance scheme (Kalaignar Kaapeettu Thittam). However, in 2011 when the AIADMK Government came to power, Star lost the Government- sponsored business and a few years later, in 2015, the Star group founder expired at the age of 87. Safecrop Investments and Jhunjhunwala acquired their major stake from the existing shareholders of the company.  As on the date of the RHP, of the equity capital of Rs 553 Cr, Safecrop is holding 47.77% and Jhunjhunwala is holding 14.98%. WestBridge, though claimed as a promoter, does not hold any share after December 2019.

Coming to the main promoter, the Bangalore-registered Safecrop is a limited liability partnership set up only in 2019 to serve as a special purpose vehicle as mandated under the IRDAI (Investment by Private Equity Funds in Indian Insurance Companies) Guidelines, 2017, in order for WestBridge AIF I to make an investment in Star Health. The designated partners of Safecrop are Sumir Chadha (nominee of Milestone Trusteeship Services Private Ltd acting in its capacity as a trustee of WestBridge AIF I) and Sandeep Singhal (nominee of Mountain Managers Private Ltd which is the investment manager and sponsor of WestBridge).

Who is the ultimate main beneficiary of WestBridge? California-based Sumir Chadha is claimed to be a co-founder and managing director of WestBridge Capital Partners. Incidentally, he has also been a co-founder of Sequoia Capital, Vesbridge Partners, etc.  Sumir has reportedly been active in the Indian venture capital industry for the past ten years. Before entering into the field of VC Funding, he had associated with Goldman Sachs and McKinsey & Co. Sumir is also the co-founder and Chairman of the US-India Venture Capital Association (US-IVCA) and also a Charter Member of The Indus Entrepreneurs. No doubt, Sumir has proved to be a successful venture capitalist. Will he prove to be a rewarding promoter for the investing public?  The way private equities are operating in this country shrouding with lot of secrecy in their ultimate ownership one cannot be too optimistic about their concern for the investing public.

Coming to the second promoter of Star Health, perhaps, for the first time Jhunjhunwala (RJ) is claimed as a promoter in an offer document. So far, Aptech is the only listed company in which he wields management control. In Nazara Tech, he had less than 11% stake in the equity at the time of its recent IPO. The company that comprehensively used the presence of this high profile investor at the time of IPO was Gurgaon-based A2Z Infra.

The 2002-incorporated A2Z roped in RJ with an investment of Rs 18 Cr in 2006. He acquired 4,29,898 shares Rs 10 each at a price of Rs 418.70 a piece. A year later, in July 2007, he got another 45000 shares at Rs 502.44 each against conversion of warrants. Thus he was holding 4,74,898 shares at an average cost of Rs 426.63 a share.  Within a month after the conversion of warrants the company came out with a bumper 11:1 bonus issue, and again in March 2010 it came out with another bonus issue in the ratio of 3:2, which brought down his cost of holding to a meager amount.

A2Z posted a quantum leap in its performance during three years between 2007 and 2010. Revenue zoomed from Rs 181 Cr in fiscal 2007 to Rs 1225 Cr in 2010. Net profit vaulted from Rs 11 Cr to Rs 98 Cr. On the back of bullish performance, the company came out with an IPO valued Rs 776 Cr. While the average cost of holding of the company’s famous investor was just Rs 14, the company asked the public to shell out Rs 400! At the time A2Z’s IPO, RJ had the highest stake (21%) after the main promoter (48%) and offered only 2,77,774 shares out of his holdings of 1,20,51,125 shares. Post-IPO, he was to hold around 16% on the enlarged equity of Rs 74 Cr.

What’s the post-IPO performance of A2Z? Despite the presence of the famous investor on the company’s board, the stock never reached the IPO price in the secondary market even after more than a decade. Within a year, the investors lost more than 75% and currently it is traded at more than 99% discount!

 

A2Z STOCK PERFORMANCE
Year	HIGH	LOW	CLOSE
2021	7.19	3.55	3.79
2020	8.50	2.82	3.18
2019	19.70	7.25	16.75
2018	48.60	8.19	26.45
2017	52.70	33.65	43.45
2016	51.65	16.50	19.90
2015	32.99	12.05	15.40
2014	36.40	9.26	10.48
2013	62.70	7.51	19.15
2012	144.50	55.15	112.90
2011	346.20	84.15	279.75
2010	398.90	314.55	–

In the case of Aptech, whose management control is with RJ, the company’s operating revenue increased steadily in the initial years after RJ took over the company. From Rs 154 Cr in 2005, revenue surged to Rs 274 Cr in 2008, and from Rs 44 Cr loss in 2005 the company’s bottom line turned to a profit of Rs 44 Cr in 2008. Nevertheless, subsequently the performance has been fluctuating. In last fiscal, it logged revenue of Rs 89 Cr on which it netted Rs 12 Cr profit.

In 2005, RJ bought into Aptech at Rs 56 a share. In 2013, the price dropped to Rs 40 despite a dividend of 40%! Last year, it was available at around Rs 65. This year, on the eve of Star Health IPO, the price has shot up to beyond Rs 400! As a matter of fact RJ and his associates have paid heavy penalty to SEBI for insider trading in Aptech shares in the past. This is the credibility and capability of the so called Big Bull!

 

APTECH STOCK TREND SINCE JHUNJHUNWALA TOOKOVER
YEAR	YEAR-HIGH	YEAR-LOW	FISCAL-END	DIVIDEND %
2021	410.80	145.00	186.65	22.5
2020	191.40	65.55	83.80	45
2019	210.00	111.80	176.60	35
2018	386.25	120.60	258.15	35
2017	403.95	162.00	230.05	30
2016	227.55	51.60	57.75	10
2015	75.90	46.30	57.80	32.5
2014	112.90	64.50	75.20	45
2013	84.10	40.15	42.30	40
2012	102.70	64.00	77.50	30
2011	147.90	65.15	98.35	25
2010	208.25	114.05	167.50	10
2009	296.00	64.75	83.30	0
2008	429.40	51.00	219.05	0
2007	448.50	147.75	218.05	0
2006	173.00	69.40	130.10	0
2005	149.35	32.05	35.70	0

 

Key Management

As the offer document reveals, the promoters have no experience in the insurance business. Hence they have to depend on the professional management. The company’s chairman and CEO Jagannathan (77), who holds master’s degree of arts in economics, has more than 47 years of experience in the insurance industry. Previously he worked with United India Insurance Company in the capacity of chairman-cum-managing director.

The company has two managing directors. One of them, Subbarayan Prakash, is a qualified doctor who holds a bachelor’s degree in medicine and a master’s degree in surgery. He reportedly has several years of experience as a surgeon and has previously worked with Saudi Operation & Maintenance Company Ltd as a specialist in general surgery/ traumatology. The other MD, Anand Shankar Roy, who holds a bachelor’s degree in commerce and a post graduate diploma in management, claims to have 21 years of experience in the insurance industry. He has previously worked with American Express Travel Related Services and ICICI Lombard General Insurance Company.

Co-founder of WestBridge Capital Sumir Chadha and employee of WestBridge Advisors Deepak Ramineedi are on the board as nominee directors representing Safecrop Investments. Promoter Rakesh Jhunjhunwala is represented by the CEO of Rare Enterprises, Utpal Sheth.

 

Business  

Star Health is claimed to be the largest private health insurer in India with a market share of 15.8% in the Indian health insurance industry in last fiscal. The company had a total GWP (gross written premium) of Rs 9,349 Cr in fiscal 2021. From being the first standalone health insurance company established in the country, it has grown into the largest standalone company in the overall health insurance market in India. The company’s comprehensive health insurance product suite reportedly insured 2.05 crore lives in fiscal 2021 in retail health and group health, which accounted for 89.3% and 10.7%, respectively, of its total health GWP. The company is strategically focused on the retail health segment and it has been consistently ranked first in the retail health insurance market in India.

 

Financial Track

Operationally Star Health had reasonably sound financial performance until the outbreak of the pandemic. In fiscal 2020 against an incremental value of premium earned Rs 1100 Cr, incremental claims incurred were Rs 800 Cr. The scenario completely changed in next fiscal. Against Rs 330 Cr incremental premium earned, the company faced an incremental claim of nearly Rs 1300 Cr in fiscal 2021. In the first half of current fiscal, the company earned a premium of Rs 4660 Cr as compared to Rs 2712 Cr in the corresponding period of last fiscal registering a growth of 72%. But, claims incurred during the first half shot up by 152%, from Rs 1634 Cr to Rs 4111 Cr. Understandably losses have mounted after the eruption of COVID-19.

 

Star Health Financials (in Cr)
Period Ended	Sep-21	Mar-21	Sep-20	Mar-20	Mar-19
Months	6	12	6	12	12
Premium Earned	4660	5023	2712	4693	3580
Investment Redemption Profit	86	2	0	4	1
Interest/Dividend/Rent income	184	259	126	188	133
Total Revenue	4930	5283	2838	4885	3714
Claims Incurred	4111	4369	1634	3087	2298
Commission	626	584	302	341	264
Operating Expenses	854	1401	631	1102	983
Provisions	0	0	0	-6	6
Operating Profit	-662	-1071	271	361	164
Other Income	167	163	64	101	62
Interest Cost	13	26	13	26	26
Admin Expenses	5	113	5	23	18
Net Profit/(Loss)	-380	-826	199	268	128
Equity	553	548	491	491	456
Reserves	3765	3676	1352	1153	587
Borrowing	650	250	250	250	250
Fixed Assets	116	99	93	102	98

 

Valuation

Star Health has fixed a price band of Rs 870-900 for Rs 10 paid-up share. In 2019 most of the transfers and preferential allotments took place at around Rs 143 a share. All the preferential allotments of this year were made at about Rs 489 per share. Currently, the company’s operations are deep in red and unless and until the pandemic is under check the company’s bottom line may continue to bleed.  Further, the current valuation has been arrived when the market sentiment is at its peak hence, in the absence of supporting profitability, such steep valuation is unlikely to sustain.

As Star’s current earnings are negative, it cannot be compared with its peers in terms of Price to Earnings. However, in terms of Price to Book Value, Star’s is very costly at 14x as compared to ICICI Lombard (9x) and New India Assurance (1.3x). Moreover, the average cost of post-issue shareholding of the two promoters, who would control more than 55% of the equity, would be a tenth of the public cost. And, the residual cost holding of all the selling shareholders including the chairman-cum-CEO will be negative after the OFS which will enable them to dump the shares at any price after the lapse of the lock-in period.

 

Concern

• Promoters are financial investors with no experience in the main business of the company.
• The company has two employee stock option plans, ESOP 2019 and ESOP 2021 and as on the date of the RHP, 1,56,89,231 options were outstanding under ESOP 2019. For the options granted during the fiscals 2019 and 2020, the exercise price was Rs 142.43 and for options granted during fiscals 2021 and 2022 the exercise price was Rs 142.43 and Rs 4896 respectively.
• The company has also made an application to the IRDAI for grant of 25 lakh employee stock options to Chairman and CEO Jagannathan under ESOP Plan 2021 at an exercise price of just Rs 10 each which will be granted on the date of receipt of IRDAI Approval.
• At the end of December 2021, more than 140 lakh shares will be free from lock-in which may cause selling pressure as the cost of holding of these shares were very low as compared to the IPO price.
• Post-IPO, Safecrop would hold 40.59% equity at a cost of only Rs 67.62 a share and Rakesh Jhunjhunwala will individually have 14.4% shares at a cost of Rs 155.28 a piece. If Aptech experience is anything to go by, one cannot rule out the possibility of the insiders playing havoc in Star Health counter after the lock-in period. After all, in this country one can easily get away from any stock market crime by paying a penalty to the regulator!