Geojit has retained its "Buy" rating on Star Health and Allied Insurance Co Ltd., setting a target price of Rs. 738, implying a potential 17% upside from the current market price of Rs. 630. The brokerage remains optimistic about Star Health's long-term growth prospects, driven by a strong brand image, expanding distribution network, and strategic initiatives to improve operational efficiency.
Key takeaways from the report:
- Q1FY25 GWP grew 17.9% YoY, driven by strong retail health premium growth and new business.
- Combined ratio deteriorated to 99.2% due to a 220 bps YoY increase in claims ratio.
- Management expects improvement in renewal and combined ratios through ongoing initiatives.
- Target price of Rs. 738 based on 4.75x FY26E BVPS.
Strong Brand Image and Expanding Distribution Network Fuel Topline Growth:
Star Health's robust brand recognition, as India's first standalone health insurer, continues to contribute to strong topline growth. Q1FY25 witnessed a 17.9% YoY increase in GWP, with retail health premium playing a significant role. The brokerage highlights the company's efforts to strengthen its distribution network through partnerships and agency businesses, which should further drive growth in the near term.
Claims Ratio Surge Impacts Profitability:
While GWP performance was positive, Q1FY25 profitability was impacted by a higher-than-expected rise in the claims ratio, which surged 220 bps YoY to 67.6%. This increase was primarily attributed to an unexpected surge in claims and the allocation of wellness costs. However, the company managed to partially offset this impact through an 80 bps YoY reduction in the expense ratio.
Management Focuses on Operational Efficiency:
The management team highlighted several strategic initiatives during the Q1 earnings call, aimed at improving operational efficiency and customer experience. The company is focusing on digitalization to streamline processes, including claims servicing. Notably, 90% of claims were processed cashless in Q1FY25, compared to 84% in the previous year. The company also plans to implement wellness and prevention programs to potentially control claim ratios in the long term.
Valuation and Outlook:
Geojit's target price of Rs. 738 is based on a valuation of 4.75x FY26E BVPS. The brokerage believes that Star Health's strong brand image, expanding distribution network, and focus on operational efficiency will deliver robust results in the long term. However, potential risks include volatility in claims experience and competitive pressures in the health insurance market.
Forward-Looking Statements:
The management has set ambitious growth targets, aiming to double GWP and triple PAT by FY28. The company expects to achieve these targets through its well-defined growth engines and competitive moat. Management also indicated plans to hike prices for approximately 30% of its portfolio by 10-15% in FY25, which could positively impact profitability.
Potential Risks and Challenges:
While the report highlights the company's strengths and growth prospects, investors should be aware of potential risks, including unexpected increases in claims frequency or severity, regulatory changes impacting the health insurance industry, and competition from established players in the market.
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