Buy Star Health Ltd for the Target Rs.520 by Motilal Oswal Financial Services Ltd
In-line underwriting performance
* Star Health’s (STARHEAL) net earned premium rose 12% YoY to INR39.4b (in line) during 1QFY26.
* Claims ratio at 69.5% (in line) grew 190bp YoY, driven by a 15% YoY increase in net claims incurred to INR27.4b (in line). Commission ratio at 14.7% (est. 14.5%) rose 120bp YoY, while net commission grew 18% YoY to INR5.1b (in line). Expense ratio at 17.9% (est. 17%) declined 20bp YoY, with employee expenses growing 6% YoY and other expenses rising 13% YoY.
* Higher-than-expected expense and commission ratios led to a combined ratio of 102.2% (up 300bp YoY), which was 120bp above our estimates. Excluding 1/n impact, combined ratio was at 100.8%.
* While underwriting profit at INR0.7b was in line with our estimate, lowerthan-expected investment income at INR3b (10% below est.) resulted in a 10% PAT beat at INR2.6b (-18% YoY).
* STARHEAL’s pricing actions, underwriting strategy, and reducing pressure from claim frequency and severity will drive an improvement in the company’sloss ratio trajectory in the coming quarters.
* Considering the in-line underwriting performance, we have kept our estimates unchanged. We reiterate our BUY rating with a TP of INR520 (based on 29x FY27E EPS).
Lower investment yield impacts PAT
* Gross written premium at INR36.1b grew 4%YoY (in line) in 1QFY26, driven by 9% YoY growth in retail health premium, which was offset by 48% YoY decline in group health premium.
* The underwriting profit for 1QFY26 came in at INR0.7b (in line) vs. INR1.4b in 1QFY25.
* Total investment income was flat YoY at INR3b (10% below est.), with investment yield declining to 6.5% (7.5% in 1QFY25). AUM grew 15% YoY to INR182.5b.
* Renewal premium ratio was at 98% (vs. 93% in 1QFY25). Fresh business in the retail health segment grew 25% YoY (excluding 1/n impact).
* Solvency ratio was largely stable at 2.22x, while investment leverage improved to 2.5x (2.3x in 1QFY25).
* IFRS PAT was INR4.4b in 1QFY26, up from INR3b in 1QFY25. Management maintains its target of tripling FY24 IFRS PAT by FY28.
* Retail health market share was stable at 31% during 1QFY26, while the overall sum insured increased 10% YoY to INR1.2m. Sum insured of fresh business increased 11% YoY to INR1.6m.
* Agency dominates the channel mix, contributing 82%, followed by digital/banca/corporate at 9%/7%/2%. Agency productivity improved 13% YoY to INR130,000 during 1QFY26. Banca channel witnessed 20%+ growth in the preferred business, which contributed 92% to banca fresh GWP. Digital channel witnessed strong 73% YoY growth in fresh business during the quarter.
Key takeaways from the management commentary
* The equity proportion in AUM increased from 10% to 15% in Mar’25 and currently stands at 17.5%. Management expects this to result in stronger investment yields over a rolling three-year horizon.
* While the earlier guidance of doubling IFRS revenue may be impacted by the strategic realignment of the corporate portfolio, the guidance of tripling the IFRS profitability remains unchanged.
* Over 65% of the book underwent price correction last year, and annual price increases are expected to continue, especially in low-profitability segments.
Valuation and view
* STARHEAL continues to witness the impact of 1/n accounting framework on growth and profitability ratios. Price hikes, along with improving trends in claim frequency and severity, may provide some relief from rising medical inflation and hospitalization trends, bringing the claims ratio down gradually over the next few quarters. Scale benefits will help to reduce the expense ratio, while the commission ratio is expected to remain in the current range.
* Considering the in-line underwriting performance, we have kept our estimates unchanged. We reiterate our BUY rating with a TP of INR520 (based on 29x FY27E EPS).
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