Star Health and Allied Insurance rating: Add | Recent stock correction overdone

We continue to believe that Star Health, with its unparalleled agency force, is best placed to harness growth in the Indian health insurance sector. Risk of increase in claims from the current Covid wave has likely driven sharp stock correction, which we believe is overdone. We cut estimates, raise cost of equity; retain Add with FV of Rs 625, down from Rs 775 earlier.

Star Health’s stock has corrected significantly in recent sessions: Star Health has corrected significantly in recent weeks. Two likely reasons: (1) low growth in 2MFY23 and (2) recent increase in Covid cases. Star Health reported 12.5% growth in retail health segments in the first two months of the year as compared to Street’s expectation of 24-25%. Notably, this growth comes on a higher base (56% growth in April and 51% May 2021). The company has stated that it will go slow on group health business (down 33.8% in 2MFY23).

We expect business momentum to catch up and hence model 23% premium growth in retail segment and 25% decline in group segments for the following ten months, translating into 17% overall growth for the year; this is lower than 25% built in earlier. After this realignment, we continue to model 22-23% growth over the next two years.

Recent increase in Covid cases has likely weighed in on the stock. While Covid cases rise, most healthcare companies suggest that hospitalisation remains low. Notably, even during Omicron, Star Health reported low Covid claims; Rs 1.2 bn in Q4FY22 versus `21 bn in 9MFY22. We believe that with low hospitalisation, the impact on Star Health and other health insurance companies may not be significant. We are increasing our claims estimate by Rs 2.5 bn for FY2023E, thereby increasing claims ratio to 69% from 65% earlier. Consequent to the above two changes, our EPS reduces by 38% for FY2023E, followed by 7% reduction in FY2024-25E. But we don’t find any risk to solvency. The firm reported 167% solvency ratio in March 2022. We expect the company to report solvency ratio of 180% by March 2023E.

Raising cost of equity; cut FV, retain ADD: Apart from a cut in estimates, we are tweaking down medium-term growth, raising our cost of equity to 13.5% from 13% earlier, to factor in this uncertainty; this translates into reduction in our Fair Value to Rs 625 (37X earnings and 6X book FY2024E, rich multiple for its strong franchise) from Rs 775 earlier. Retain Add.