Medi Assist, the largest Third Party Administrator (TPA) in the country, has filed a Draft Red Herring Prospectus (DRHP) for an upcoming IPO.
The Rakesh Jhunjhunwala backed company is offering 2.8 Crore Shares which is 40% of its Equity for sale.
Soumeet combs through the prospectus to get the specifics of the TPA business and ends with some questions for management.
Indian markets have been unwaveringly optimistic. IPOs are heavily over-subscribed and with the outbreak of coronavirus, the criticality of healthcare services has come into sharp focus. A great time for Medi Assist to launch its Initial Public Offering (IPO).
But will the IPO be more than a big payday for exiting investors?
Also, what exactly is a Third Party Administrator? What does a TPA even do?
First, a little about the potential Medi Assist Public Offer.
The Potential Offer Size
On March 5, 2021, the company converted some earlier issued preference shares into equity shares. Then, there was a stock split and a bonus issue. Adjusting for these factors, according to our calculations, the issue price of the equity shares given in lieu of preference shares comes to around ₹ 257.
There is no indication from the company about valuation at which it will look to sell shares. If the company is valued at ₹ 260 per share, which we believe might be the lowest it might consider, it would be valued at ₹ 1,800 Crores. This will mean a 4x-9x return for promoters and early investors. Note the offer price might well be much higher.
The Health Insurance Third Party Administrator Business
In the Health Insurance Value Chain:
- Health Insurers assess and price risk involved in insuring groups or individuals based on their demographics, occupation and lifestyle. Risk for the insurer is the likelihood of the insured needing hospitalization. Insurers can get it wrong in two ways: Overestimating risk and therefore setting their premiums too high loses them business. Underestimating risk and setting premiums too low causes losses as their payouts exceed premiums collected. From a shareholders’ perspective, the theoretically perfect Health Insurer is one that can accurately target and sell health insurance to perfectly healthy individuals with low-risk lifestyles who never need to visit a hospital.
- Hospitals provide the care needed to the Insured and get compensated for their care by the Health Insurer. If you’ve admitted a friend or relative to hospital, you’ve been through the long wait as the hospital reaches out to the Insurer (or TPA) to get clearance that they will cover the costs, before admitting the patient.
- Third-Party Administrators (TPAs) are intermediaries between health insurers, customers (insured), and hospitals. The Insurance Regulatory Development Authority (IRDA) states what TPAs can offer:
- Servicing of claims under health insurance policies by way of pre-authorization of cashless treatment or settlement of claims other than cashless claims or both, as per the underlying terms and conditions of the respective policy and within the framework of the guidelines issued by the insurers for settlement of claims.
- Servicing of claims for Hospitalization cover, if any, under Personal Accident Policy and domestic travel policy.
- Facilitating carrying out of pre-insurance medical examinations in connection with underwriting of health insurance policies
In a nutshell, a Third-party administrator (TPA) processes medical insurance claims. Insurers can work with more than one TPA, and TPAs can offer their services to multiple Insurers.
Medi Assist is India’s largest health benefits administrator in terms of revenues and premium serviced for health insurance policies.
The company generates most of its revenue from servicing corporate health insurance. While revenue from servicing retail health insurance and government schemes contribute equally.
For a TPA like Medi Assist, revenue depends on the Premium under management. As its revenue cannot exceed 5.5% of the premium under management. From government-sponsored insurance schemes, it earns based on a fixed fee per claim or per family per year basis. Thus, largely the growth of a TPA depends upon the growth of the health insurance industry.
On the corporate side, the company services half of the Nifty 50 index companies and 41% of the BSE 500 index companies. It has serviced over 7,800 corporate accounts across sectors and has been able to retain 95% of its clients. On average, the company has serviced 10 of its largest corporates for at least 8.8 years.
On the retail side, the company manages nearly 4 million policyholders. However, looking at the premium under management, it appears that the company’s focus remains on corporate accounts.
Why would a Health Insurer choose Medi Assist?
Being the largest TPA, the company has developed a pan-India healthcare provider network, which comprised over 11,000 hospitals across 722 cities and towns in India. In FY20, nearly 9%, 7%, 5%, 3%, and 3% of the hospital revenues of Apollo group, Manipal group, Fortis group, Max group, and Narayana Health, respectively, was attributable to claims processed by Medi Assist.
As a large player, the company gets discounts and preferential packages from hospitals which in turn benefit insurance companies.
Medi Assist’s portals, allow insurance companies to have real-time access to claims processed and can view documents submitted and queries raised, among others. They can study trends, compare historical performance, conduct analysis, and make informed decisions to optimise their health benefits portfolio.
The technology deployed by the company has so far been able to achieve a success rate of 17% in the detection of fraudulent claims during the first nine months of FY21 which resulted in savings of close to ₹ 86 crore for insurers.
Among the clients, government-owned insurer – New India Assurance is its largest client. Medi Assist has been working with New India Assurance for the last 19 years.
Financial Highlights
As of December 31, 2020, the company had a net worth of ₹ 247 crores. This translates to ₹ 36 Book value per share. It is net debt-free, with ₹ 72 crores short-term debt and ₹ 130 crores cash and cash equivalent.
Over FY18-20, the company’s revenue grew at a CAGR of 17.3%, while its premium under management grew at 19.7%. However, its EBITDA grew at a lower rate of 3.5%. This was on account of higher employee costs and other expenses. Moreover, its net profit declined over the same time period due to higher depreciation and tax expenses and losses from discontinued businesses.
The tax expense as % profit before tax (PBT) increased to 38.2% in FY20 against 31.3% in FY18, while losses from discontinued businesses increased to ₹ 4.6 crores Vs ₹ 3.4 crores. In the first nine months of the financial year 2021, the company incurred ₹ 5 crore loss from discontinued businesses.
Discontinued businesses relate to card processing operations for a government contract.
TPA: Competitive Landscape
The company has no listed peer in the Indian market. The Insurance TPA business is competitive, with 23 TPAs in operation. However, of these, the top 10 control about 92% of the market. In addition, insurance companies’ in-house operations are a substitute for TPAs.
Over FY18-20, Medi Assist has maintained its leadership position. Its market share has increased from 22% to 25%, while the revenue has grown at a better rate than its nearest peers.
In terms of premium services, Medi Assist is nearly double the size of its nearest peer. However, the difference in revenue terms is a lot less. Even though the company accounted for one-fourth of the total revenue pool of TPAs, it has consistently focused on profitability, which is reflected in its higher share of the EBITDA and PAT pools of TPAs. Medi Assist’s EBITDA from continuing operations accounted for 48%, and net profit accounted for 44% of the TPA industry.
Final Thoughts
We see Medi Assist as a proxy play on the increasing demand for health insurance in India. The pandemic has provided a shot in the arm for the health insurance industry in India. The prospect of hospitalisation due to covid-19, and high medical costs in private hospitals have driven more Indians to sign up for private health insurance.
According to a Business Standard report, the health insurance portfolio of general and standalone health insurers has seen considerable growth last fiscal year, driven by demand for retail health products. In FY21, the non-life insurance industry saw health premiums go up 18.1% to ₹ 58,584 crore, compared to ₹ 49,600 crore in FY20. Similarly, retail health has seen 38% growth in the same period to ₹ 26,258 crore from ₹ 19,014 crore.
Along with this, a growing number of insurance programs launched by various state governments and the central government, increasing awareness and acceptance of health insurance as a utility is expected to grow the premium services under health insurance at CAGR of 21% over FY20 to FY25.
An investor bullish on the health insurance industry would be better off investing in Medi Assist rather than a general insurance company as they will be insulated from the inherent risks borne by an insurance company.
The biggest risk that Medi Assist faces is competition. While the industry is crowded with 23 players, a small number own the bulk of the market. As of FY20, there were only four players which generated a revenue of more than ₹ 100 crores, while the remaining six generated revenue in the range of ₹ 45-88 crore. This opens up the possibility of mergers and/or acquisitions.
Now, if the shares are issued at ₹ 260, then based on annualized FY21 earnings, price-to-earnings ratio of the offer would be close to 40.6 times. Valuations look expensive. Note this our rough estimate, the actual offer price is not yet known.
While the offer price will be a key component in determining attractiveness, given the TPA industry is not well-documented from a public markets perspective, we’d want to understand a few things.
Questions to management:
- How does the company procure the contract to manage/service the policies?
- Pricing power in the industry? Do rivals undercut to get more premium under management?
- Why did the employee cost increase at such a high rate? As this is the key expense, what can investors expect going forward?
- Given the high cash balance on its book, is the company looking for any inorganic growth opportunities?
- Details and understanding regarding discontinued operations?
- Why its nearest peer generates comparatively more revenue for less premium under management?
We’ll update this post when the company comes out with an offer price and any additional information that help us gauge whether the Medi Assist IPO is a Subscribe.
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