Domestic brokerage house Nuvama Institutional Equities has initiated coverage on Star Health and Allied Insurance Co Ltd with a 12-month target price of Rs 770, citing its dominant market leadership position with 33.7 percent share in fiscal 2023 in a fast-growing retail health market.
"This is more than 3 times the second-largest player, HDFC Ergo's 9.7 percent. Agency-led distribution and strong competitive pricing has lifted retail health to 82 percent of its FY23 gross written premium (GWP), which is highest among standalone health insurers (SAHIs), PSU insurers and other large multi-line private insurers," Nuvama said.
The brokerage said that Star Health has ambitious growth plans of above-industry growth rates and capturing a greater market share.
Star Health's individual agency force expanded at FY18-23 compound annual growth rate (CAGR) of 21 percent to 0.64 mn, which is 25.6 percent of market share. Incremental new business is diversified with non-agency channels contributing 30 percent.
The company has several long-term bank channel partners, and as per analysts, management has a medium-term target of lifting banca’s share to 10 percent of the total distribution mix.
Loss ratios comfortable
Claims ratios adjusted for Covid-19 over FY18–23 works out to 60–66 percent, healthy given the large book size. "Given low loss ratios in the new book (due to exclusion periods), our analysis suggests that the loss ratios for the old seasoned business is at reasonable at 70 percent," as per Nuvama.
"The health insurer's retail pull lies in its 15,100 network-empanelled hospitals Q1FY24, accounting for 73 percent and 85 percent of claims by number and value. For 61 percent of network, Star Health has negotiated complete pricing (15 percent lower than out-ofnetwork)," it said.
According to Nuvama, the management is confident of cutting the loss ratio via multiple levers.
The brokerage also said that Star Health has been making underwriting profits barring covid-impacted periods, and is clinically focused on driving underwriting and operational excellence.
"We expect greater network effect with scale to drive up returns ratios—to 16.7 percent by FY26E versus 12.4 percent in FY23," it said.
Late investor Rakesh Jhunjhunwala was a promoter of Star Health. He (14.24 percent) and Rekha Jhunjhunwala (3.07 percent) held 17.31 percent stake in the company as of the June 2023 quarter, according to shareholding pattern data available on BSE.
Shares of Star Health slipped 3 percent to trade at Rs 626.55 apiece during Wednesday's late afternoon deals. The stock, which was listed at Rs 848.80 on December 10, 2021, is trading 26 percent lower to the market debut day level.
On a year-to-date basis, Star Health shares have gained 7 percent, while it tumbled 15 percent in the last one year.
(Edited by : C H Unnikrishnan)
First Published: Sept 13, 2023 2:42 PM IST
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