Mutual funds, employees give a pass to Star Health IPO
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Mutual funds as well as employees of Star Health & Allied Insurance Co Ltd, gave a cold shoulder to the company’s initial public offering (IPO) that closed on Thursday, with the company raising a lower amount than what it intended to, data filed with stock exchanges reveals.

The Rakesh Jhunjunwala-backed company managed to raise about Rs 6,410.18 crore from investors, against its original target of Rs 7,249.18 crore, after receiving just 79% overall subscription for its IPO. Though the share sale was able to close successfully even with the poor response, Star Health was the first company in 2021’s stellar IPO market that failed to raise the entire target amount.

Surprisingly, the employee quota in the IPO was subscribed only 10% -- the lowest subscription for this category among 50 odd deals that have hit the markets this year, data from primary market tracker Prime Database reveals.

Other companies that saw a low employee participation in their public offerings this year include Macrotech Developers (Lodha), Nureca Ltd and Suryoday Small Finance Bank, which saw employee category subscriptions of 13%, 13% and 24%, respectively. These companies, however, managed to receive over 100% overall subscription in their IPOs.

To be sure, the employee category subscription number is not generally viewed as one of the critical indicators of overall demand for an IPO.

“Most companies these days don’t have an employee category in their share sales. It used to be a common feature many years ago. Companies now prefer ESOPs as the primary way to give employees a part in the value creation journey, although the employee quota does help in giving a similar opportunity to others who are not covered under such stock option programs,” said a capital markets investment banker, who spoke on the condition of anonymity.

Another category of investors that seemed to be missing in the Star Health IPO were the domestic mutual fund industry.

The anchor book allocation sheet filed by the company with exchanges shows that only one mutual fund house - Edelweiss MF - participated in the anchor allotment. The anchor allotment is a discretionary allotment of shares to institutional investors that companies do a day ahead of the opening of their IPO and is considered as a good indicator of investor demand for the deal. Anchor investors have a 30-day lock-in.

“While one can say that anchor allotment is discretionary and thus it is not necessary to allocate shares to domestic mutual funds, the absence of this investor set does mean something, because if these investors were keen on the company, they would have ensured that they got some allocation in the anchor book,”  said a capital markets lawyer, who also spoke on the condition of anonymity.

Star Health did not respond to a request for comment.

Ahead of the IPO, some brokerages expressed concerns on the valuation that the company was seeking, even as they found the company’s growth prospects attractive. The share sale valued the company at around Rs50,000 crore.

“At higher price band of Rs. 900, Star Health is demanding a MCAP-to-net premium earned multiple of 10.3x, which is at premium to the peer average. Moreover, the demanded valuations is at elevated premium to recent capital issuance,” Choice Broking said in a report.

Last week, in an interaction with Mint, the Star Health senior management mentioned that it believed that new investors will find the valuation “very comfortable" given the company’s growth prospects, its business model and market position.

“The valuation has been arrived at scientifically looking into various factors. Definitely we believe this valuation will be very comfortable for the new investors also. But we are more focused on the long-term growth and we believe that we’ll be able to deliver the results in the long term," said Anand Roy, managing director, Star Health in an interview.

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