Buy Star Health Ltd for the Target Rs. 570 by Motilal Oswal Financial Services Ltd
Loss ratio improves; strong growth in fresh business
* Star Health (STARHEAL)’s net earned premium grew 10% YoY to INR40.8b (in-line) in 2QFY26. For 1HFY26, NEP grew 11% YoY to INR80b.
* The claims ratio at 71.5% (vs. our estimate of 72.5%) declined 130bp YoY, while net claims incurred grew 8% YoY to INR29.2b. The commission ratio at 16.3% (vs. our est. of 15%) grew 250bp YoY, while net commission grew 26% YoY to INR6.9b (8% higher than estimates). Expense ratio at 16% (vs. our est. of 16.5%) declined 50bp YoY, with employee expenses declining 2% YoY and other expenses rising 17% YoY.
* Better-than-expected claims ratio and expense ratio, offset by a higherthan-expected combined ratio, led to an in-line combined ratio of 103.8% (our estimate of 104%), which increased 80bp YoY. While underwriting loss was lower than our estimates, a 9% miss in investment led to in-line PAT at INR0.5b (-51% YoY). For 1HFY26, PAT declined 26% YoY to INR3b.
* The GST waiver has led to a sharp rise in demand, with the company witnessing ~50% growth in fresh business in Oct’25. Persistency rates are likely to improve as customer affordability rises, and higher sum insured, along with price hikes, are likely to improve loss ratios going forward.
* We raise our commission ratio estimates, considering commissions being inclusive of GST going forward, which has resulted in an 11%/8%/11% dip in our FY26/27/28 earnings. We now value the company based on IFRS PAT and reiterate our BUY rating with a TP of INR570 (based on 26x Sep’27E IFRS PAT).
Growth trajectory stable; claims ratio improves YoY
* Gross written premium at INR44.2b grew 1% YoY (in line), driven by 8% YoY growth in retail health premium, which was offset by a 47% YoY dip in group health premium. For 1HFY26, the premium grew 2% YoY to INR80b. Excluding the impact of 1/n, GWP grew 12% YoY to INR8.8b.
* The underwriting loss for 2QFY26 came in at INR2b (vs. our estimate of INR2.9b) compared to the underwriting loss of INR1.9b.
* Investment income declined 16% YoY to INR3b (9% below est.), with investment yield declining to 6.5% in 1HFY26 (8.1% in 1HFY25). AUM grew 14% YoY to INR186.7b.
* The renewal premium ratio was 98% in 1HFY26 (vs. 94% in 1HFY25). Fresh business in the retail health segment grew 24% YoY. Post the GST exemption, fresh business has grown 50% YoY as per the management.
* The solvency ratio was largely stable at 2.15x, while investment leverage improved to 2.5x in 1HFY26 (vs. 2.4x in 1HFY25).
* Insurance revenue, according to IFRS, grew 12% YoY to INR44.3b. IFRS PAT declined 36% YoY to INR796m in 2QFY26. The IFRS loss ratio for 2QFY26 was at 71.8% (73.7% in 2QFY25). The IFRS combined ratio improved to 101% (104.8% in 2QFY25), driven by efficient claims management as well as operational efficiency.
* The IFRS retail loss ratio in 1HFY26 was largely stable at 69.9%, while the IFRS group health loss ratio declined to 82.1%.
* Retail health market share was stable at 32% during 1HFY26. The sum insured of fresh business as of 1HFY26 has increased 3% YoY to INR1.7m, and this improving trajectory is expected to improve loss ratios going forward.
* Agency dominates the channel mix, contributing 83%, followed by digital/ banca/corporate at 9%/7%/2%. Agency productivity improved 15% YoY to INR220,000 during 1HFY26, while the company added 30,000 agents during this time period. The digital channel experienced a strong 47% YoY growth in fresh business during 1HFY26.
Key takeaways from the management commentary
* The OPD segment is emerging as a meaningful new growth vertical, aided by the GST waiver on health insurance, which has significantly improved affordability.
* From 1st Oct’25, all intermediary commissions are inclusive of GST, ensuring that the loss of input tax credit does not impact P&L. This structural change is also expected to bring greater cost transparency across distribution models.
* Annual repricing exercises, delayed by a couple of months due to GST-related adjustments, are underway and are expected to further support profitability.
Valuation and view
* Premium growth has been subdued, largely owing to the impact of 1/n accounting. Going forward, GST exemption, as well as the impact of 1/n going away, should improve the growth trajectory for the business. We remain optimistic about the overall prospects for Star Health, backed by 1) consistent growth in retail health, given its under-penetration and GST exemption, 2) a strong push from the banca channel, and 3) steady growth in specialized products and deepening presence.
* We believe that Star Health can deliver long-term growth with the investments made in profitable channels and products. The claims ratio is likely to improve and stabilize at 69-70% levels, driven by rising sum assured as well as price hikes. In contrast, continued operational efficiency and a stable commission ratio will lead to improvement in the combined ratio in the long term.
* We raise our commission ratio estimates, considering commissions being inclusive of GST going forward, which has led to an 11%/8%/11% dip in our FY26/FY27/ FY28 I-GAAP earnings. We now value the company based on IFRS PAT and reiterate our BUY rating with a TP of INR570 (based on 26x Sep’27E IFRS PAT).
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