IGI Logo

Business moats to help combat competitive pressures

Retail health is a high growth business with high entry barriers. This is proved by the fact that (1) retail health premiums have grown by 20% CAGR over the last 5 years and (2) no player has been able to grow its market share meaningfully apart from Star Health and Care Health over the last 5 years. In such an industry scenario, STAR is a distant market leader in retail health (31% as of FY23-TD based on monthly GDPI data released by General insurance council) and 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. Considering a range of GDPI growth (15-20%) and combined ratio (93-95%), possible PAT in FY24E is Rs9.75bn-11.6bn and ROE of 13-16%, implying current valuations of 23.5x-28x. Our estimates factor lower end of the earnings estimates. We believe the fear of business impact on life insurers selling retail health indemnity is overdone. Maintain BUY.

Retail health insurance is a high growth industry and STAR has a pole position in the same. This continues to be the investment thesis:

STAR retail health GDPI has grown at 29% CAGR between FY18-22 vs industry retail health GDPI growth of 18%. FY23-TD growth has moderated to 13% on the high base of Apr/May’21. Market share as on FY23-TD stood at 30.6%, higher than 29% in FY22-TD (Apr and May’21).

No player has been able to gain market share in retail health organically except Star and Care:

No company has been able to garner a significant amount of market share in the retail health segment except Star Health and Care Insurance (and also HDFC Ergo due to acquisition of Apollo Munich which was SAHI). Star/Care retail health market share has improved from 23%/4% in FY18 to 33%/7% in FY22, respectively.

PSU pie will continue to give market share gain opportunity to well-entrenched players like STAR:

PSU market share erosion in retail health segment along with low solvency ratios will provide enough headroom for the growth of strong private players. PSUs’ retail health market share declined from 38.3% in FY18 to 25.9% in FY23-TD.

Fears of life insurers selling retail health indemnity leading to business impact of STAR is overdone:

Life insurance companies offered indemnity based health products till 2016. They had an indemnity product (which was long term) till 2013. Approximately 21,000 policies were sold per annum till 2013 compared to ~8.8mn retail health policies sold by nonlife insurers in FY13. Even now, life insurance companies offer critical illness products. As such, with strong agency (550k agents) and hospital network (12,820 network hospitals) along with product innovations, STAR should be able to sustain any increase in competitive pressure.

Maintain BUY:

We value the stock with a revised target price of Rs700 based on 40x (earlier 50x) FY24E EPS of Rs17.5 (earlier 16.7). 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.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

SEBI Registration Number INZ000183631

Above views are of the author and not of the website kindly read disclaimer