Buy Star Health Ltd for the Target Rs 700 by Emkay Global Financial Services Ltd
Star Health delivered a healthy 1QFY27 performance, with claims ratio improving by 100bps yoy to 67.5% and combined ratio down by 160bps yoy to 97.1%, driven by improvement in claims ratio and reinsurance expense ratio. The consistent improvement in claims ratio over recent quarters is on the back of a cumulative effect of
1) portfolio strengthening
2) optimization toward preferred segments
3) risk-based pricing
4) reduction in fraud and abuse cases
5) institutionalization of wellness initiatives
6) strong growth in fresh premium. Given that 2Q has a seasonally high claims ratio due to vector borne diseases, Management remains watchful of this ratio in the coming quarter and continues to implement measures to keep it under control. Management maintains focus on a sustainable and profitable growth strategy while reiterating its ambition of delivering mid-to-high teens ROE. We introduce Ind AS-based estimates and build in slight improvement in COR over FY27-29E driving strong PAT growth. We maintain BUY and revise up Jun-27E TP by ~8% to Rs700 from Rs650, implying FY28E PER of ~22x
Healthy performance during the quarter driven by improvement in claims ratio
GWP at Rs42.87bn increased 18.9% yoy during 1QFY27, while Insurance revenue at Rs49.17bn grew 13.4% yoy. Insurance Service result at Rs4.25bn increased 48% yoy, driven by lower reinsurance expense and improved claims ratio. Claims Ratio improved by 100bps yoy to 67.5% in 1QFY27, while Acquisition Expenses Ratio at 23.4% was largely flat yoy. Reinsurance Expense Ratio at 0.4% improved by 90bps yoy, driving Combined Insurance Service Ratio (CISR) at 97.1% – an improvement of 160bps yoy. Underwriting Profit at Rs1.11bn increased from Rs0.16bn in 1QFY26, driven by improvement in claims ratio. Led by strong investment income and underwriting profitability, PAT at Rs5.5bn increased 25.5% yoy, whereas normalized PAT at Rs3.86bn (assuming ~8% investment yield) grew ~44% yoy.
Focus remains on profitable growth journey
The company has witnessed consistent improvement in claims ratios over the last few quarters, driven by a 360-degree approach that includes repricing the portfolio, geographic segmentation and portfolio calibration, efficient claims management led by better fraud prevention measures, and implementation of multiple wellness initiatives. With 2Q being a seasonally high claims-ratio quarter given vector-borne diseases, Management remains watchful of the overall situation ahead. Additionally, with tech and AI-led initiatives, Management expects 30-40bps improvement in expense ratio, as productivity and efficiency improve. Management remains optimistic of growth in Insurance revenue ahead, despite base-effect normalization from 2HFY27 given the unwind from long-term policies. Overall, Management continues to prioritize a profitable growth strategy targeting mid—to-high teens ROE over the medium term.
We maintain BUY and increase Jun-27E TP by 7.7% to Rs700
With the company transitioning to Ind AS-based accounting, we introduced Ind AS estimates. We maintain BUY and increase Jun-27E TP to Rs700 from Rs650, implying FY28E PER of 22x. We remain watchful of the claims ratio trajectory ahead
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