Credit Suisse initiates coverage on Star Heath with target of Rs 600

The scrip surged 11.40 per cent to close the day at Rs 530.20 on BSE. Post the 33 per cent decline in the past month, the market has already priced in the entry of life insurers as the stock now trades at 34 times, which is a bear case-forward earnings.

“Given regulatory outcomes are yet unknown, we value the company assuming a status quo in the industry structure. However, the uncertainty will likely weigh on long-term fair multiple, and hence, we assign a lower multiple of 33 times FY24E forward, a 30 per cent discount to fair value multiple and arrive at a target of Rs 600,” the brokerage said.

With the stock trading at 27 times FY24 and 22 times FY25E base case earnings, Credit Suisse believes the risk-reward is attractive.

The company is promoted by seasoned investor Rakesh Jhunjhunwala, who along with his wife Rekha, accounted for a 17.51 per cent stake in the company as of March 31.

Credit Suisse said the FY22 claims ratio was impacted by the Covid second wave. The fourth quarter of FY22 loss ratio has already improved to 68 per cent and was 64 per cent ex-Covid.

“We expect normalisation of claims and a 200 basis points reduction in opex ratio will drive overall combined ratios to 95 per cent by FY25E, and ROEs will climb to 18 per cent,” it said.

Credit Suisse said Star Health’s gross premiums saw a 31 per cent CAGR over FY17-22, led by strong retail growth. It expects gross premiums CAGR of 22 per cent over FY22-25, led by volume growth of 13 per cent and higher average ticket size led by dynamic repricing and upselling.

While the recent media reports of opening up the health sector to life insurers raised concerns around higher competitive intensity in the medium term, Credit Suisse does not envisage immediate pricing aggression as life insurance players too are battling margin pressure and limited capital headroom.

“Further, we believe market share losses may be lower for Star Health given its large agent, and that the hospital network (12000+) can act as a partial moat,” Credit Suisse said.




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