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Star Health (Star) reported decent performance for Q4FY23, completing the year post the pandemic with a combined ratio for FY23 at 95.3%, coming near the top end of ~93/-95% combined ratio target. Premium growth for FY23 at 13% was largely in line with our estimates and was driven by ~18% growth in retail and a ~33% decline in group (in line with management’s guidance of exiting the large corporate group health business). PAT for FY23 came in 13.7% lower than our estimate at Rs6.2bn, largely led by lower NEP than our estimates. However, with the company achieving the 95.3% CoR, we believe Star is on the right track to achieve profitable growth, given its expanding hospital network, strong distribution network, and some normalization in medical inflation. Given that Star is within the 35% Expense of Management (EoM) cap, the company is well positioned in the new EoM regulations era. We have tweaked our estimates for FY24-25E and reiterate our BUY rating with a revised Mar-24 TP of Rs685, implying a 32x FY25E P/E and 2.1x FY25E P/GWP

Decent operating performance; lower NEP drives PAT miss: For Q4FY23, Star’s GWP grew by 13.8% YoY to Rs4.2bn, broadly in line with our estimates. However, lower-than-expected NEP for Q4FY23 led to underwriting loss of Rs0.65bn, against our expectation of an underwriting profit of Rs0.46bn. Claims ratio for Q4FY23 and FY23 came broadly in line with our expectations at 62% and 65%, respectively, leading to an inline combined ratio for Q4FY23 and FY23 at 91.4% and 95.3%, respectively. Despite inline CoR, lower-than-expected PAT for FY23 at Rs6.18bn was driven by a 2% miss on NEP and 4% miss on investment income. Similarly, for Q4FY23, PAT at Rs1bn came significantly lower than our estimate of Rs2bn, driven by a miss on NEP and lower investment income. (Exhibit 1)

Management expects the combined ratio to improve further: Star is expected to deliver claims ratio of 63-65%, owing to strong FY23 performance, price hike taken in its major policies, and Covidrelated impact largely behind. Claims costs are expected to further improve, driven by efficient claims processing systems in place, the shortest possible turnaround time, and efficient anti-fraud systems. Star should further see improvement in combined ratio as the price hike in key products and investments in distribution are expected to start delivering results. Star’s EoM is below the 35% limit as against peers, and this paves way for Star to grow better than its peers, given its strong franchise, widening network of hospitals, and expanding distribution channels. (Exhibit 9)

Solvency ratio strong at 214%; no requirement of fresh capital: Star reported solvency ratio of 214% for FY23 vs. 167% for FY22 despite repayment of Rs2.5bn worth borrowing. With the required solvency factor being moved to premium-based factor from claims, we expect solvency ratio to be broadly stable in FY24 as PBT, RoE and premium growth are expected to move in a similar range. The ~Rs1bn miss in PAT for Q4FY23 led to a ~4% impact in solvency margin as against our expectation of ~220% solvency margin for FY23. However, improvement in solvency ratios should put the talks of capital raise to rest.

Minor tweak to our estimates, reiterate BUY with a revised Mar-24 TP of Rs685: We have tweaked our estimates for FY24/25E, reflecting Q4FY23 developments. Our medium to long-term growth and profitability expectations remain broadly unchanged. We reiterate our BUY rating on the stock with our Mar-24 TP of Rs685 (implying 32x FY25E P/E and 2.1x FY25E P/GWP).

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