Rakesh Jhujhunwala-owned Star Health and Allied Insurance Company’s stock price has continued to reel under pressure and corrected significantly in recent sessions mainly on account of low growth in 2MFY23 and recent increase in Covid cases. Risk of increase in insurance claims from the current wave of the pandemic has likely driven the sharp stock correction, according to analysts. In the last one month, the stock has tanked around 30 per cent. However, analysts at ICICI Securities have a positive outlook on the stock as they believe that the fear of business impact on life insurers selling retail health indemnity is overdone. The domestic brokerage sees Star Health shares rallying up to 47 per cent going forward.
Rakesh Jhunjhunwala is the promoter of Star Health. Jhunjhunwala (14.4 per cent) and his wife Rekha Jhunjhunwala (3.11 per cent) collectively held 17.51 per cent stake in the firm as of the 31 March 2022 quarter, according to the shareholding pattern data. In terms of number of shares, the stake translates into 100,753,935 shares of the company. Of the total number of shares, Jhunjhunwala holds 82,882,958 shares and his wife has 17,870,977 shares. Star Health stock has corrected 48 per cent from its issue price of Rs 900 when it debuted on stock exchanges in December last year. At present, Star Health share price is quoting 50 per cent down from its record high level of Rs 940, touched on listing day.
Should you buy Star Health shares on dip?
ICICI Securities: Buy
Target price: Rs 700, Upside: 47 per cent
The brokerage in its recent report stated that Star Health is a distant market leader in retail health and is well entrenched with 550k agents, 12,820 network hospitals and 807 branches. Additionally, the high share of PSU insurers with low solvency continues to provide a growth opportunity for strong players like Star, it added. “Considering a range of GDPI growth (15-20%) and combined ratio (93-95%), possible PAT in FY24E is Rs 9.75bn-11.6bn and ROE of 13-16%, implying current valuations of 23.5x-28x,” analysts said in the report. The brokerage values the stock with a revised target price of Rs 700. “We factor GDPI CAGR of 16.5% between FY22- 24E, investment leverage of 2.3x in FY24E, combined ratio of 95% and investment yield of 7% for FY24. Our change in multiple reflects the possibility of heightened competition, subsequent covid waves and overall increase in the cost of capital,” analysts said in the report.
Kotak Institutional Equities: Add
FV: Rs 625
The brokerage continues to believe that Star Health, with its unparalleled agency force, is best placed to harness growth in the Indian health insurance sector. “Risk of increase in claims from the current Covid wave has likely driven sharp stock correction, which we believe is overdone. We cut estimates, raise cost of equity; retain Add with FV of Rs 625, down from Rs 775 earlier,” it said. Analysts expect business momentum to catch up and hence model 23% premium growth in retail segment and 25% decline in group segments for the following ten months, translating into 17% overall growth for the year. “Apart from a cut in estimates, we are tweaking down medium-term growth, raising our cost of equity to 13.5% from 13% earlier,” it said.
Use correction to buy on dips for the long-term
“Star Health is a leading health insurance player in India having a market share of 32% in the retail segment and 14% in the overall health insurance business. The company has a long runway of growth due to low penetration of health insurance in India, rising out-of-pocket expenditure, inadequate financial protection for unfavorable health occurrences, and increased awareness and affordability. The company’s singular emphasis on health insurance products allows it to create innovative products and deliver excellent customer service,” said Punit Patni, Equity Research Analyst, Swastika Investmart Ltd.
Patni further added, “The company has plans to improve its distribution network by focusing on BANCA & digital channels, improving claim ratio, optimizing OPEX, and keep on introducing innovative products to enhance its profitability. However, investors must be aware of the competitive nature of the industry and being in a mono-line business, the company is subject to black swan events like the covid pandemic. Further, the primary issue of the company was richly priced and the high claim ratios during the pandemic had severely impacted the company, leading to diminishing investors’ interest. Nevertheless, the correction provides an excellent opportunity to buy on dips for the long term and we expect the company to turn profitable in the coming years.”
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