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Building a ‘healthier’ future!

Stepping into the spotlight | All growth levers at play

* Star Health (STARHEAL) is expected to clock 20% retail health premium CAGR over FY23-25 led by: 1) increasing sum assured per policy, 2) price hike in its flagship product, and 3) deeper penetration that is driving growth in the number of policies.

* Management is intensely focusing on growing the business through the banca channel, with the help of the benefit-based products that have much higher profitability than retail health products. The share of banca stood at 5% in FY23 and is expected to double by FY25.

* The share of specialized products too has continued to rise and was at 15.5% in FY23 vs. 11.2% in FY21. The contribution of network hospitals to cashless claims has also been rising (67% in FY23 vs. 55% in FY21). We expect the trajectory to sustain given the increasing number of specialized products as well as rising associations with hospitals.

* STARHEAL has maintained its guidance of reaching a combined ratio of 93- 95%, with a bias towards the lower end. Further, with solvency at 218%, we do not envisage any equity dilution in the near term.

* We expect a 19% NEP CAGR over FY23-25 and project the combined ratio to improve to 92.5% in FY25 from 95.0% in FY23. These should result in a PAT CAGR of 47% over FY23-25 and RoE improving to 16% in FY25 from 11% in FY23. We reiterate our BUY rating with a 1-year TP of INR730 (premised on 32x FY25E EPS).

Macro factors aided by favorable regulations to drive industry growth

* The Expense of Management (EOM) regulation will have positive outcomes for STARHEAL as a majority of the competition is above the threshold of 35%/30% (SAHIs/GI players), while STARHEAL operates well below.

* In terms of commissions, overall payouts were in excess of 30% for new book and 15% for old book. Management is looking to optimize the commission ratio by charging differently on old book and new book.

* The exposure draft had a clause that if the existing EOM is below the ceiling then it has to be maintained at levels of the last three-year average. However, the same has been removed.

* IFRS implementation is likely in a couple of years and that would benefit its profitability ratios as expenses would be booked over the term of the products.

* From here on, simultaneous activation of three key growth drivers: 1) a surge in the count of policies issued (retail health penetration of just 4%), 2) strategic implementation of price hikes (file & use rules make it easier), and 3) an upswing in the sum assured per policy will translate into a sustainable 20%+ CAGR for the industry over the medium term.

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