Niva Bupa Health Insurance: A Promising Investment in a Growing Sector
Niva Bupa Health Insurance has emerged as the second standalone health insurance (SAHI) initial public offering (IPO) in recent times, following Star Health. As a fast-growing company in a rapidly expanding segment, Niva Bupa presents a compelling proposition for long-term investors. However, the current valuation comes at a premium, transferring the risk of growth to investors. With a reported profit after tax (PAT) of ₹82 crore in FY24, the upper band of the IPO values the company at ₹13,520 crore, translating to an eye-watering 165 times price-to-earnings (PE) ratio—significantly higher than Star Health’s 33 times PE. While the inflated PE multiples reflect Niva Bupa’s nascent operations and lower profitability, its price-to-book ratio aligns closely with industry standards at 4.5 times its FY24 book value, compared to Star Health’s 4.4 times. Investors are advised to monitor the company’s profitability expansion over the coming years before making investment decisions. The IPO comprises a fresh issue of ₹800 crore and an offer for sale (OFS) of ₹1,400 crore from promoters Bupa Singapore and Fettle Tone (True North).
Strong Tailwinds in the Health Insurance Sector
The retail health insurance sector has demonstrated robust growth, with a 10% increase in volume and a 7% rise in prices over the past five years. This trend is expected to continue, driven by factors such as under-penetration of health insurance, high medical inflation, and a burgeoning middle class. These elements are fostering financialization and consumption, creating a favorable environment for sustained growth.
Niva Bupa has capitalized on these tailwinds, emerging as the second fastest-growing SAHI with a remarkable 42% compound annual growth rate (CAGR) in gross premiums from FY18 to FY24—double the sector’s growth rate. The company has established a significant market presence, capturing a 17.3% market share in SAHI by FY24.
The backing of a strong parent organization has further bolstered Niva Bupa’s growth trajectory. Founded in 2008 as a joint venture between Max and Bupa, the company transitioned to its current shareholder, True North, in 2019. This change coincided with a period of rapid growth, although the company faced challenges during the pandemic. Bupa, as a multinational health insurance leader, enhances Niva Bupa’s capabilities in technology integration, product design, execution, and management.
Profitability Challenges and Opportunities
In FY24, Niva Bupa reported a PAT margin of 2% on net premiums, significantly lower than Star Health’s 6%. This disparity can be attributed to the combined ratio (CR), which accounts for claim expenses and operating costs. While Niva Bupa’s CR has shown improvement, it still lags behind Star Health, which benefits from a more mature operational profile.
Despite its lower profitability, Niva Bupa’s valuation remains competitive with Star Health based on book value, at 4.5 times compared to Star Health’s 4.4 times. This reflects investor expectations for future growth. As Niva Bupa’s premium profile matures, there is potential for a decline in operating expenses, leading to a CR ratio of around 94-95%, which would enhance profitability. However, a key risk lies in the potential increase in claims expenses as the age of policyholders rises, particularly after the exclusivity period of three to four years. The company’s underwriting practices and technological integration have thus far managed to contain claim expenses, but any failure to do so could adversely affect the CR and overall profitability.
Key Drivers and Valuation Insights
Niva Bupa has effectively leveraged both volume and pricing strategies, supported by favorable industry dynamics. The company has benefited from periodic inflation adjustments, improved product designs, and enhanced coverage options. Medical inflation has necessitated annual price adjustments, a shift from the previous practice of three-year intervals. Niva Bupa’s innovative products, which cater to wellness, millennial aspirations, and digital claims processing, have enabled better pricing strategies.
The company has maintained coverage levels exceeding ₹10 lakh for over 70% of its policies in the last two years, distinguishing itself in an industry where basic coverage often starts at ₹2 lakh. This focus on the mass-affluent segment has contributed to a 14% CAGR in average ticket size per policy from FY22 to FY24, outpacing competitors like Care Health and Star Health.
While Niva Bupa’s impressive 40% CAGR from FY22 to FY24 is noteworthy, it is essential to consider the impact of a low base and the post-COVID recovery. The sustainability of consistent price adjustments and their effect on volume growth over the next five years will be critical to monitor at the industry level.
Conclusion
Niva Bupa Health Insurance stands at a pivotal juncture, offering a blend of growth potential and inherent risks. While the company has demonstrated impressive growth metrics and benefits from strong industry tailwinds, its premium valuation and lower profitability compared to established players like Star Health warrant caution. Investors are encouraged to keep a close eye on the company’s profitability trajectory and market dynamics before committing to this promising yet risky investment opportunity.