Medi Assist IPO: Should you subscribe?

Medi Assist Healthcare Services or Medi Assist is the first third party administrator (TPA) to come with an IPO, which opens on January 15. The insurance administrator has priced itself at close to 35 times H1FY24 earnings (annualised) after adjusting for one-time employee incentive programme. This is a premium compared to broad market valuations and compounded by the risk factors facing the company.

But considering the strong end-market growth, cost leadership which ensures a leading market share, we recommend that investors subscribe to the issue. The issue is an OFS where the promoter stake will stand at 46 per cent from 77 per cent pre-issue.

TPAs act as the facilitator between three parties — policyholder getting the benefits, insurer providing the payment and the hospitals providing the services. Risk underwriting, enrolment and marketing the policies are undertaken by insurers. They, in turn, outsource policy administration, customer service, claims processing and network management to TPAs. In return for providing these services, Medi Assist generates 3-4 per cent of the premiums under management (PUM). With TPAs accounting for more than half of the PUM in health insurance and Medi Assist with a leading share, the IPO can be an alternative way to play the health insurance growth in the country.

End-market growth

In terms of premium, Health insurance witnessed an 18 per cent CAGR growth in FY17-22 according to the RHP. With 50 per cent of healthcare expenditure being met out of pocket in the country, and coupled with 14-15 per cent medical inflation, the high growth in insurance penetration should be expected to continue. TPAs, which service 54 per cent of the industry PUM, are expected to gain at more than end-market as TPA coverage improves. Medi Assist reported a 35 per cent CAGR in PUM in FY21-23 owing to such industry dynamics.

Group, retail and Government policies are expected to fill the gap in health coverage, with Covid providing a strong impetus to awareness of health insurance in the recent period. Government (State and Central) accounts for 10 per cent of Medi Assist revenues in H1FY24 and the company expects to keep up the proportion in order to maintain margins. Medi Assist derived 88 per cent of PUM from group policies, which have been a fast-growing segment. With the attention now shifting to retail, the company is expected to focus on this segment as well with Raksha acquisition in August 2023, which has 8 per cent market share in retail market.

Cost leadership and Leading share

TPA being a fragmented industry, there are 16 active players. Medi Assist is the leader in the industry with 42 per cent of the TPA market by premiums, which implies a 21 per cent share in overall health insurance. By profits as well, Medi Assist accounts for 56 per cent of the TPA industry profits with its healthy margin profile.

Cost leadership is the leading reason for such large market share. As an outsourced administrator, Medi Assist ensures lowest cost per transaction and high efficiency. Compared to Medi Assist’s 25 per cent revenue CAGR in FY21-23, employee costs (40 per cent of revenues) have grown at only 17 per cent CAGR.

The company is deriving more from employee owing to size and technological leadership. Compared to a largely offline servicing in TPA industry, Medi Assist claims 80 per cent online and automated transaction, implying a technological barrier compared to others. For the insurers’ Medi Assist reports limiting medical inflation to 5 per cent against 15 per cent in market, which is another draw in its favour. Its network spans 18,000+ hospitals in the country, covering 1,000+ cities and towns. Medi Assist has largely deployed its own interface to smoothen the claim processing time, leading to a third of the claims being auto processed.

Risks

TPAs’ growth is a derivative of growth in health insurance. There is an option for the policyholder to choose a TPA from the multiple choices. This is an overhang on the company, despite leading service metrics. The Government is introducing a health exchange platform — Bhima Sugam. While this may lead to faster penetration, given the large availability of data on networks, insurance claims and payment details, TPA added advantage may erode a bit on commercialisation of the platform, which is still some time away, though. Bhima Sugam being an unknown risk currently, investors may monitor the situation in the long run.

The fee charged by Medi Assist is also on a declining trend. From charging 4.4 per cent of PUM in FY21, the metric has declined to 3.3 per cent in H1FY24. This is on account of product mix, according to the company. Even as revenue growth at 25 per cent in the period has been strong, investors have to take note of declining fee per cent.  

But the company has been able to maintain its adjusted EBITDA margins at 23 per cent in the last three years, which is ahead of the 11-12 per cent in the industry. This in H1FY24 margins dipped to 20 per cent on account of one-time acquisition-related charges — Medvantage TPA (from February 13, 2023) and Raksha TPA (from August 25, 2023). Onboarding the entities to the existing technology platform, the company can bounce back to earlier margins.  

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