Q3FY24 Review: Star Health: Steady quarter, more price hikes ahead

2 Feb 2024 , 11:36 AM

Star Health (STAR) reported 16% YoY growth in GWP while PAT grew by 38% YoY in Q3FY24, led by higher investment income, lower shareholder expenses, and benefit from retrospective impact of the reinsurance treaty entered into for long-term retail health products. Underwriting profit stood at Rs1.14bn, marginally declining YoY on higher loss ratios due to continued incidence of fever and infectious diseases in October. STAR reiterated their focus on profitable growth in the retail business while investing in non-agency channels. They are taking price hikes in another ~10- 12% of their portfolio in Q4, after doing so in their largest product last year (~48%). Analysts of IIFL Capital Services expect STAR to grow its GDPI/EPS at 18%/25% Cagr over FY24-26. STAR’s efficient cost structure and re-pricing strategy may lead combined ratios to stabilize in 95- 97% range and also potentially benefit them under the new EoM regulations. Analysts of IIFL Capital Services fine tune FY24-26 EPS; their 12-mth TP is unchanged at Rs700, based on 30X 2-yr forward EPS. Maintain BUY. 

Retail Health remains the key growth driver: 

STAR reported GWP growth of 16% YoY in Q3 with Retail GWP clocking healthy growth of ~16% YoY. STAR plans on taking a price hike on two of its products in the coming quarter, which constitute 10% of the portfolio. With this, close to 60% of their portfolio would have witnessed price hike in the past one year and would boost GDPI growth in 4QFY25 and beyond. 

Seasonality impacts loss ratios: 

Loss ratio for Q3 was at 67.7%, increasing by 390bps YoY, on account of continued incidence of fever and infectious diseases in October, although STAR stated that ratios have fully normalised post that. Combined ratio, as a result increased by 300bps YoY. While STAR did not give guidance on combined ratio, they reiterated their focus on growing value over volume. During Q3, STAR has entered into a Reinsurance Treaty with 50% share for its long term retail health products w.e.f. April 01, 2023, which resulted in net increase of Rs0.48bn in Q3 PAT. 

Maintain BUY: 

Analysts of IIFL Capital Services see STAR as a strong compounding story (25% EPS Cagr over FY24-26) and it is attractively trading at 30X/25X on FY25/26 P/E post significant underperformance since IPO. Analysts of IIFL Capital Services maintain BUY with 12- mth TP of Rs700 based on 30x 2YF EPS. Key risk: Regulatory changes.