BoFA, CLSA, Motilal Oswal: Why are these brokerages bullish on Star Health?

Brokerages have turned bullish on Star Health’s growth trajectory after the company announced March quarter results in-line with street estimates, coupled with factors like growing market leadership in the retail segment, dominant agency network and diversified portfolio.

In the quarter-ending March (Q4FY24) results, Star Health’s net profit jumped 40 per cent to Rs 142.3 crore, as against Rs 101.8 crore in the same quarter a year ago.

Its net premium earned jumped 16.6 per cent to Rs 3,395.3 crore, from Rs 2,912.5 crore in the same quarter previous fiscal.

However, Star Health’s underwriting loss widened to Rs 91 crore, from a loss of Rs 65.4 crore in Q4FY23. The combined ratio (COR), meanwhile, stood at 92.77 per cent as opposed to 97.83 per cent year-on-year (YoY). The combined ratio serves as a metric for assessing the profitability of an insurance company, providing insights into its operational performance over time.

That said, management expects the retail health insurance industry to record mid-teens growth, and aspires to outpace the
industry.

On the bourses, the stock has recovered 21 per cent from its recent lows, hit on March 1, 2024. Besides, over the past 3 months, it has dropped 0.31 per cent as against 3.32 per cent rise in the benchmark S&P BSE Sensex. On the technical front, the scrip is trading below 200-DMA (580-level), putting a lid on a runaway rally.

Here’s what brokerage said on Star Health’s Q4 performance:

BoFA | Buy | TP: Rs 715

Analysts at BoFA have a ‘Buy’ rating on Star Health given its strong track record of market share gains, dominant agency network, market leading product innovation, diversified portfolio, extensive hospital network, strong industry growth outlook underpinned by low penetration, and attractive valuations despite premium multiple given strong earnings growth trajectory.

“We value Star Health at Rs 715 per share based on FY26E P/E of 30x. While this is at a premium to listed peers, we believe this is justified given its strong gross written premium (GWP) growth, which is far higher than any of its listed peers; higher earnings growth potential,” BoFA said in a note.

Downside risks, analysts believe, include attrition of trained sales personnel; and failure to develop and maintain satisfactory relationships with agreed network hospitals

CLSA | Buy | TP: Rs 700

Despite a challenging FY24, CLSA said Star Health's focus on the agency channel, low-cost distributors is encouraging.

Star Health also plans to take a price hike on two products that make up about 10 per cent of gross premiums. The hike, analysts suggest, could be in the range of 15-25 per cent.

Considering these factors, “We now expect it to deliver a RoE of 17-18 per cent over FY25-26CL. Steady market share and improvement in loss ratio will be key deliverables,” it said.

IIFL Securities | Buy | TP: Rs 700

IIFL Securities analysts expect Star Health to grow its gross direct premium income/earnings per share (GDPI/EPS) at 18 per cent/27 per cent CAGR over FY 24-26. Its  efficient cost structure and re-pricing strategy, it said, may lead combined ratios to stabilise in 95-96 per cent range, and also potentially benefit them under the new EoM regulations.

B&K Securities | Buy | TP: Rs 670

Star Health, analysts said, has been growing consistently quarter-on-quarter (Q-o-Q) in the high-teen range on the back of market leadership in the retail segment and a strong growth recovery in the group segment.

Going ahead, the impact of Family Health Optima (FHO) renewal price hike should start reflecting in NEP and aid loss ratios

“We expect the expense ratios to remain stable and loss ratios to improve gradually aiding the COR in FY25 and then taper down to sub-95 per cent levels.,” B&K Securities said.

Motilal Oswal | Buy | TP: Rs 730

Star Health has tightened its underwriting standards to focus on high-quality business, analyst at Motilal Oswal said. They remain optimistic about the overall prospects for Star Health, backed by strong growth in retail health, given its under-penetration; strong push from the banca channel; sustained growth in specialised products; and deepening presence.

The brokerage, however, expects Star Health to increase prices by 15-20 per cent in Q1FY25 for senior citizen health insurance products and Young Star insurance products.  

“Given the long-term growth potential for the industry, along with investments by Star Health in profitable channels and products, we reiterate our ‘Buy’ rating on the stock with a TP of Rs 730, based on 30x FY26E EPS.