Rakesh Jhunjhunwala-Backed Star Health Jumps Most On Record On Credit Suisse Action

Shares of Star Health & Allied Insurance Co., backed by billionaire investor Rakesh Jhunjhunwala, jumped the most on record after Credit Suisse initiated coverage with an ‘outperform’, citing its largest agency network, continued expansion and an attractive risk-reward ratio.

Star Health’s gross premiums have grown at 31% over FY17-22 versus 11% for the overall general insurance industry, Credit Suisse said in a report. “This was driven by its domination (33% market share) in the retail health business, the fastest-growing segment in the industry given under-penetration and increasing customer awareness.”

The research house also expects Star Health’s gross premiums to rise on healthy volume growth and better realisations. As retail health remains an assisted product, with agency share at 75% in channel mix, Star Health stands to benefit as it has the largest agency network, nearly three times more than the next largest player, it said. “Over FY22-25E, we expect strong retail renewals (95%) and continued network expansion (17% CAGR) to drive volume growth of about 13%.”

Credit Suisse set a target price for Star Health at Rs 600 apiece, implying a potential upside of 26.1% from the current levels.

Star Health’s return-on-equity will also recover on lower claims. “FY22 claims ratio was impacted by the Covid-19 second wave. The Q4 FY22 loss ratio has improved to 68%. We expect normalisation of claims, and a 200-basis-point reduction in opex ratio will drive overall combined ratios to 95% by FY25 and RoEs will climb to 18%.”

Besides, a 33% decline in Star Health’s stock price in the past month means that the market has priced in the entry of new life insurers.

“While we expect life players to gain volume share given cross-sell potential with term life, we do not envisage immediate pricing aggression as they too battle margin pressure and limited capital headroom. Market share losses may be lower for Star Health given its large agent and hospital network can act as a partial moat,” Credit Suisse said.

Given regulatory outcomes are yet unknown, Credit Suisse values the company assuming a status quo in the industry structure. “The uncertainty, however, will likely weigh on long-term fair multiple and hence, we assign a 30% discount to fair value multiple.”

Shares of Star Health rose as much as 16.4%—the most since its debut in December last year—to Rs 554.2 apiece on the BSE, before closing 11.4% higher on Thursday. But the stock has fallen more than 43% below its initial public offering price of Rs 900.

Of the 26 analysts tracking the company, 10 maintain a ‘buy’, one suggests a ‘hold’ and three recommend a ‘sell’, according to Bloomberg data. The 12-month consensus price target implies an upside of 47.1%.