Rakesh Jhunjhunwala-backed company gets Emkay buy rating, up 25% seen

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As the shares of Star Health and Allied Insurance Company were recently listed on the National Stock Exchange and the Bombay Stock Exchange at a price reduced by almost 6%, the private sector health insurance company began trading at ??848.80 at ESB, while at NSE trading opened at an even lower level at ??845 against the issue price of ??900 per share.

According to stock analysts, the poor response to Star Health’s rating has been attributed to the company’s lower profitability due to Covid-19 as well as expensive valuations.

Meanwhile, brokerage firm Emkay announced that it had launched a cover on Star Health with a buy rating worth ??1,135, which represents an increase of 25%. The brokerage informed, “We launched a hedge on Star Health with a buy rating and a March 23 TP of Rs1,135 (+ 25% up). Our TP involves a valuation multiple of 47x the BPA FY25E and a P / GWP FY25 of 2.9x. “

Here are the highlights of the report

Emkay pointed out that as the health insurance industry is in its infancy, it is expected to push forward dizzying growth rates of 20% over the next decade. . He said that “increasing the sum insured to catch up with medical inflation, gains in age-specific pricing and re-pricing will likely account for half of the growth in premiums.”

Calling Star Health a “pole star,” the Emkay report pointed out that together with Star Health, it dominates the market share in the retail sector and offers network effects including hospitals, customers and agents who feed off each other in a virtuous circle. Emkay reported, “Star Health’s execution prowess has been flawless. Its 31% share in retail healthcare and its 16% share in overall healthcare have clashed with established PSU giants and well-established private multi-line insurers. Where applicable, future execution risks are lower with the size and scale on the back. Star Health is now a ‘pole star’. “

According to the Emkay report, “The scale will invariably lead to more margin gains and better margin control than its peers, after hitting a threshold, Star Health’s scale can help boost hospital traffic in return for better rates, keeping the cost of claims, the biggest expense item in Checks. All of these levers allow the company to keep the combined ratio in the 94-95% range. It should be noted that an improvement of 100 bp of the combined ratio results in a 250 bp improvement in RoE. “

Emkay also estimated that Star Health’s GWP would experience a 25% CAGR through FY 25 and said the unit’s economy is “extremely favorable, we expect an ROE of 18% + so that claims normalize in a 66-67% band (after the Covid-19 bump), capping the combined ratio at 94-95%. “

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