Buy Star Health Ltd for the Target Rs 700 by Motilal Oswal Financial Services Ltd
Creating a disciplined leadership story!
* Retail health insurance – the fastest-growing non-life insurance segment (FY20-25 CAGR of 18%), has witnessed stellar growth of ~30% in 2HFY26, supported by rising healthcare inflation, improving awareness, increasing middle-class penetration and GST exemption. However, penetration at <5% of Indian population leaves a long runway for steady high-teen growth. ? Against this backdrop, Star Health and Allied Insurance (STARHEAL) – the largest retail health player with 30%+ market share since FY21 – has seen its retail health GWP growth trajectory improve from 17% CAGR over FY21-26 to 20%+ since Oct’25 to date, while the number of lives covered has seen a 12% CAGR over FY20-25 (vs. 7% for industry).
* After witnessing unfavorable claims experience in FY25 (retail loss ratio of 69.2% vs. 65.8% in FY24), STARHEAL’s underwriting performance has recovered on the back of strong fresh business growth (+37% YoY in FY26) and calibrated repricing actions with retail loss ratio at 68.2% in FY26. Going forward, the annual repricing on 80% of the portfolio should reflect in further improvement of the loss ratio, along with continued momentum in fresh business.
* The company has simultaneously recalibrated its group health strategy toward profitability-focused growth by reducing exposure to loss-making corporate accounts and increasing focus on SME/MSME and benefit-led businesses. While the contribution of group health has declined to <5%, this has led to an improvement in the group loss ratio from 90.8% in FY25 to 79.1% in FY26.
* STARHEAL’s competitive moat is anchored to its agency-led distribution architecture (830,000 agents in FY26) with continuous improvement in agent productivity (INR430,000 in FY26). Along with increasing productivity of agents, the rising contribution of digital channel should support the acquisition of younger and profitable customers.
* Regulatory developments around EoM, commissions, solvency and IFRS reporting could materially reshape industry economics over the medium term. However, STARHEAL’s dominant proprietary distribution mix, lower dependence on institutional channels and improving operating leverage potentially position the company relatively better within the evolving regulatory framework.
* We estimate a CAGR of 16%/32% in IFRS insurance revenue/PAT during FY26-28, with the CISR improving to 98.3% in FY28E. We maintain BUY rating on the stock with a TP of INR700 (valuing the company at 26x FY28E IFRS PAT).
Valuation and View
STARHEAL increasingly appears to be transitioning toward a structurally improving retail health franchise built around stronger cohort quality, better underwriting discipline and deep distribution capabilities.
* The combination of strong fresh business growth, younger customer acquisition, calibrated repricing, higher long-term policy mix and investments in prevention ecosystems is beginning to materially improve underwriting outcomes.
* The company’s dominant agency distribution platform, particularly across nontier-1 geographies, continues to provide a significant competitive advantage in a category where customer engagement and servicing remain critical.
* Key monitorables would be
(1) Retail loss ratio improvement
(2) Fresh business growth
(3) Group health profitability
(4) Impact of potential commission regulations
(5) Operational leverage to keep CISR in 97-98% range and RoE in mid-teens.
* We estimate a CAGR of 16%/32% in IFRS insurance revenue/PAT during FY26-28, with the CISR improving to 98.3% in FY28E. We maintain BUY rating on the stock with a TP of INR700 (valuing the company at 26x FY28E IFRS PAT).
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