Star Health: Structural growth at reasonable price!

25 Jan 2024 , 11:27 AM

Recommendation: Buy; Target price: Rs 700

 

Analysts of IIFL Capital Services initiate coverage on Star Health and Allied Insurance (STAR) with a BUY rating and a 12-month target price of Rs700, implying 26% potential upside. STAR is India’s largest retail health insurer with a 32% market share in retail health in M9FY24. Analysts of IIFL Capital Services expect STAR to grow its GDPI/EPS at 18%/24% Cagr over FY24-26, driven by rising health insurance penetration, unparalleled agency distribution, competitive product portfolio and industry leading underwriting performance. STAR’s efficient cost structure may drive combined ratios to stabilize in 95-97% range and also potentially benefit them under the new EoM regulations. Analysts of IIFL Capital Services 12- mth TP is based on 30X 2-year forward EPS with 24% EPS Cagr. With valuations de-rated to 24x on FY26 P/E, analysts of IIFL Capital Services believe recent earnings underperformance is priced in and the stock offers an attractive entry point to own a long term compounding story. BUY. 

India health insurance is a secular growth story: 

Health insurance is significantly underpenetrated with only 3.7% of the population owning individual health policies (ex-govt.). Analysts of IIFL Capital Services expect retail health industry to compound at 18-20% Cagr over the next five years, driven by growth in lives covered, sum assured and pricing, which in turn would be led by rising healthcare costs, lifestyle diseases, urbanization, improved affordability and government initiatives towards health coverage for all by 2047. 

Strong competitive advantages to secure leadership position: 

Analysts of IIFL Capital Services expect STAR to maintain its retail leadership on 1) diversified product suite with focus on specialized products (introduced 44 new products since FY18), 2) risk management focus with in-house claims and extensive hospital network driving superior claims ratio, 3) strong agency (666k agents, grown at 21% CAGR since FY19 and developing banca/digital channels, and, 4) leveraging on changes in regulatory regime (e.g. EoM). 

Reasonable valuations, strong compounding: 

Analysts of IIFL Capital Services see STAR as a strong compounding story (24% EPS Cagr over FY24-26) and it is attractively trading at 28X/24X on FY25/26 P/E post significant underperformance since IPO. Near term moderation in growth, tad higher combined ratios and risk of composite license had added to the de-rating but are largely priced in. Key risks: Composite license, higher competition, regulatory changes.