Legendary investor Rakesh Jhunjhunwala-backed Star Health and Allied Insurance Company's shares moved within a narrow range around the flatline on Monday. The Star Health stock gave up initial gains but still managed to quote at a slight premium over its issue price. Emkay initiated coverage on Star Health with 'buy' rating and a target price of Rs 1,135 for March 2023.
Star Health shares rose to as high as Rs 924.9 on BSE, and Rs 924.6 on NSE, before erasing the day's gains on Monday - a premium of close to three percent.
At 11:15 am, the Star Health stock was trading Rs 900.3 on BSE, down 0.7 percent on the day, and Rs 901.7 on NSE, down 0.6 percent.
Emkay said its target price implies a valuation multiple of 47 times its FY25E EPS, and a FY25 P/gross written premium (GWP) of 2.9 percent.
The brokerage said its high-conviction call on Star Health is underpinned by three factors:
The health insurance industry is still in its infancy - heady growth rates of around 20 percent expected in the next decade
Star Health's dominant market share in the sticky retail sector offers network effects - the trio of hospitals, customers and agents feed off each other in a virtuous cycle; sub-scale competitors will struggle to outdo this moat
Margin gains expected with scale"We estimate Star Health's GWP to see a 25 percent CAGR through FY25. Unit economics are extremely favourable - we expect ROE of 18 percent+ as claims normalise in a 66-67 percent band (after the COVID-19 hump), capping the combined ratio at 94-95 percent. We apply a discounted cash flow (DCF) model to arrive at our March 23E TP of Rs 1,135," Emkay said.
The brokerage is of the view that investors should not be deterred by high valuations, "which are rightfully anchored to Star Health's nearly unassailable position in a high-growth industry".
Last week, Star Health shares recovered initial losses to make it to positive territory compared to their issue price of Rs 900 following a weak market debut. On the listing day, Star Health shares managed to close at a premium over the issue price of Rs 900.
The Star Health stock closed at Rs 906.9 on BSE (a premium of 0.8), and Rs 901 on NSE (0.1 percent) on Friday. Earlier that day, Star Health shares began their journey in the secondary market at a discount of around six percent to the issue price.
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The weak listing of Star Health and Allied Insurance - owned by a consortium of investors such as the Big Bull Jhunjhunwala, and Westbridge Capital - reflects the trend seen in the grey market in the past few days.
Star Health's IPO, which was available for bidding from November 30 to December 2, was subscribed an overall 79 percent, receiving bids for 3.6 crore shares as against the 4.5 crore shares on offer.
The portion reserved for retail investors was subscribed 1.1 times and that for qualified institutional buyers one time. The non-institutional investors' category saw a subscription of 19 percent.
(Edited by : Sandeep Singh)
