Buy Star Health Ltd For Target Rs.560 by Motilal Oswal Financial Services Ltd
Performance broadly in line; claims ratio remains elevated
* Star Health (STARHEAL)’s net earned premium grew 15% YoY to INR38b (in line). For 9MFY25, the net earned premium grew 16% YoY.
* The claims ratio at 71.4% (vs. our est. of 71.0%) rose 370bp YoY, led by a 22% YoY rise in net claims incurred to INR27b (in line). Operating expenses were in line, with the expense ratio (incl. commission ratio) at 31.9%.
* Elevated loss ratio and commission ratio led to a 550bp YoY surge in the combined ratio to 103.3% (vs. our est. of 102.4%) in 3QFY25. Adjusted for 1/n implementation, however, the ratios were in line.
* PAT was INR2.2b (in line; - 26% YoY). For 9MFY25, PAT dipped 8% YoY.
* Management maintains its guidance of doubling the FY24 revenue by FY28. Additionally, the focus is on adapting to the multiple regulatory & accounting changes and achieving a robust growth trajectory for IFRS PAT.
* Considering the rising medical inflation and the impact of the 1/n framework, we cut our earnings by 6% for FY25E. However, we maintain our earnings for FY26/FY27E. We reiterate our BUY rating with a TP of INR560 (based on 26x Sep’26E EPS).
Combined ratio remains above 100%, with a slight impact of 1/n
* Gross written premium (GWP) at INR37.9b grew 5% YoY (6% miss) driven by a 7% YoY rise in retail health premium to INR35.3b. However, the group health premium dipped 15% YoY to INR2.2b. For 9MFY25, GWP grew 13% YoY. Without considering the impact of 1/n framework, GWP rose 16% YoY for 9MFY25.
* The underwriting loss for 3Q came in at INR490m vs. the underwriting profit of INR1.1b. Total investment income stood at INR3.5b (3% lower than our estimate), growing 22% YoY.
* New business contributed ~24% of the overall premiums in 9MFY25, with fresh GWP rising 27% YoY.
* The commission ratio at 14.1% (vs. our est. of 13.8%) rose 300bp YoY, while net commission grew 44% YoY to INR5b (in line). The expense ratio at 17.7% (vs. our est. of 17.6%) declined 130bp YoY because of a 4%/6% YoY increase in other expenses/employee expenses.
* For 9MFY25, without considering the impact of the 1/n framework, the expense ratio was 30.6%, and the combined ratio came in at 101.3%, reflecting a like-to-like YoY increase of 20bp/300bp.
* The agency channel contributed 82% of STARHEAL’s business, followed by Banca (7%), Digital (7%) and Corporate (4%). 70% of the premiums were collected digitally, and the company witnessed a 22% YoY growth for fresh digital business.
* Investment assets stood at INR167b by the end of 3QFY25, reflecting an investment leverage of 2.3x. Investment yield for 9MFY25 was 8.3% (vs. 7.6% in 9MFY24)
Key takeaways from the management commentary
* STARHEAL has completed repricing of 65% of the retail health portfolio, the impact of which will be witnessed over the next few quarters. The price hike is driven by medical inflation. The FHO price hike was done two years back, and another was done this quarter. The impact of the same will be seen over the next 18-24 months.
* Recently launched product – Super Star, offers unparalleled flexibility and customization. The product has become the top-selling product on Star Health’s digital platform as well as on leading web aggregators & digital partners.
* STARHEAL is already following the 1/365 method for URR, and hence, no significant impact of the new 1/n accounting framework is expected.
Valuation and view
The new 1/n accounting framework will likely impact premium growth as well as the expense ratio, but we expect trends to remain stable on a like-to-like basis. The claims ratio continues to remain elevated owing to higher claims and rising medical inflation. Recent pricing actions may provide some relief to the claims ratio over the next few quarters. Scale benefits will help reduce the expense ratio, while the commission ratio is expected to remain in the current range. Considering the rising medical inflation and the impact of the 1/n framework, we cut our earnings by 6% for FY25 and kept it largely similar for FY26/27. We reiterate our BUY rating with a TP of INR560 (based on 26x Sep’26E EPS).
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