Buy Star Health Ltd For Target Rs 650 By Emkay Global Financial Services Ltd
Star Health reported solid performance in Q4, with the claims ratio improving 440bps YoY to 64.8% and the combined ratio improving to 94.8%, primarily driven by the improved claims ratio. This consistent improvement in the claims ratio over recent quarters is the result of multiple factors, including
1) Strong growth in fresh premiums
2) Annual price hikes
3) Portfolio calibration
4) Wellness and homecare initiatives
5) Fraud prevention measures. Going forward, the management remains confident of continued improvement in the claims ratios led by annual price hikes, growth in fresh premiums, and measures taken over the last few quarters. While focus remains on profitability, the management aims for premium growth in the high-teens and RoEs in the midto-high-teens range. To bake in the Q4 developments, we have increased our GWP estimates by ~2% and cut CoR estimates by 70-90bps, which results in ~6-8% increase in PAT over FY27-28E. We maintain BUY and increase our TP by ~24% to Rs650 from Rs525 (implying FY28E P/E of ~30x), given the consistent improvement in the claims ratio and a focus on profitable growth.
Sharp improvement in claims ratio steals the show
During Q4, GWP at Rs59.7bn (+16% YoY) was ~1% lower than our estimates. The net retention ratio at 93.8% (flat YoY) was lower than our estimate of 94.3%, which resulted in NWP at Rs56bn, missing our estimate by ~2%. NEP at Rs43.3bn increased ~14% YoY and was ~6% lower than our estimate of Rs46bn. The claims ratio at 64.8% improved 440bps YoY and was 240bps lower than our estimate, driven by various measures implemented over the previous quarters, as well as strong growth in fresh premiums. The expense ratio (including commission) at 29.9% was flat YoY and was marginally higher than our estimate of 29.6%. Consequently, driven by the improvement in the claims ratio, the CoR at 94.8% improved 440bps YoY and beat our estimate by 210bps. PAT at Rs1.1bn was significantly ahead of our estimate of Rs0.8bn, driven by higher investment income and improving underwriting performance.
Claims ratio improvement to continue; focus remains on profitability
Q4FY26 saw a sharp improvement in the loss ratio to 64.8%, driven by strong growth in fresh premiums, annual price hikes, and measures such as portfolio calibration, wellness initiatives, and fraud prevention. The management remains confident of continued improvement in the claims ratio, led by growth in fresh premiums and annual price hikes. The company also witnessed an improvement in claims frequency, led by lower seasonal diseases and the impact of telemedicine and home healthcare initiatives. Going forward, the management aims to grow premiums in the high-teens range and deliver mid-to high-teen RoEs, with a focus on profitability rather than market share expansion.
We maintain BUY and increase TP to Rs650
To reflect the Q4 performance, we have tweaked our estimates, resulting in ~2-3% increase in GWP and ~70-90bps cut in CoR (owing to improvement in loss ratios) leading to ~6-8% increase in PAT over FY27-28E. We maintain BUY and increase our Mar-27E TP by ~24% to Rs650 (from Rs525 earlier) given the significant improvement in the claims ratio and strong, profitability growth outlook. Going forward, consistent improvement in the claims ratio will be the key to drive a stock re-rating.
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