Stars are aligned to growth in Indian health insurance
Star Health Insurance (STAR) is the leading health insurance player in India with 14%/32% market share in total/retail health insurance segment as of 10MFY22. A strong network of 0.53mn agents, >12,000 hospitals and 737 branches as of 9MFY22 makes STAR a dominant franchise in Indian health insurance with significant entry barriers. This is further complemented by healthy financials (18% PAT CAGR over FY16-FY20 and average RoE of 15.5% over FY18-FY20) and strong management. While FY21/FY22 have been impacted by covid, we see good prospects for >20% premium CAGR in Indian health insurance space till FY30 on the back of: 1) structural under-penetration, 2) increasing consumer awareness and 3) rising affordability. We see STAR well placed to be one of the biggest beneficiaries of the same.
- Under-penetration is a simple investment thesis for health insurance in India: Health insurance suffers from severe under-penetration (0.36% GDPI vs global average of 2%), poor density (US$5 vs China US$66 in terms of premium per person), lower health care expenditure share (3.5% of GDP vs global average of 9.8%), high out-of-pocket expenditure (63% as of CY18 vs global average of 18%), low government spending (27% of total healthcare expenditure) and high medical inflation (average 6.5% p.a. in past three years). Of India's total population of 1.3bn, retail insurance coverage is available to only 43mn while group/government insurance covers 94mn/362mn, respectively (as of FY21). As such, there is strong potential for 20% annual growth in health premium in India for many years to come.
- More than 15% premium growth and less than 95% combined ratio can set up a healthy business value over time; STAR is expected to outperform these contours. Recommend BUY. While business sensitivity to loss ratios will be high (as seen in FY21/FY22), the retail focus and growth expectations in new business (~25% of the book) should help maintain high profit and help STAR to maintain 12%/17% RoE over in FY23/24E. We value the stock at Rs806 (50x FY24E P/E and 8x FY24E P/B). These valuations are higher than average multiples for listed multi-line peer (Long term average P/E / P/B is 41x/7x) on account of the higher growth expectations in health segment where STAR has leadership position.
- Investment thesis of STAR includes market-leading position (expected GDPI of Rs118bn in FY22E), product and distribution leadership, attractive financials and strong management. STAR has 0.46mn (0.06 mn exclusive) agents compared to the total of 0.77mn agents in SAHI as of FY21 (~81% of STAR's health GWP is driven by agents). STAR has tie-ups with >10,800 hospitals (7,000 had preferred rate tie-ups as of FY21).
- Being a monoline insurance company, risks include higher sensitivity to loss ratios, which can lead to stress in solvency on incidents such as pandemic. However, our calculation indicates the company will not require fresh capital if it is able to maintain its overall combined ratio at <96%.
Shares of Star Health and Allied Insurance Company Limited was last trading in BSE at Rs. 635.55 as compared to the previous close of Rs. 633.20. The total number of shares traded during the day was 22364 in over 2069 trades.
The stock hit an intraday high of Rs. 650.00 and intraday low of 625.20. The net turnover during the day was Rs. 14241661.00.