Buy Star Health; target of Rs 1135: Emkay Global Financial

Emkay Global Financial's report on Star Health

Our high-conviction Buy on Star Health is underpinned by three factors: 1) health insurance industry is still in its infancy - we expect heady growth rates of ~20% in the next decade; 2) Star Health's dominant market share (>3x nearest competitor) in the sticky retail sector offers network effects - trio of hospitals, customers and agents feed off each other in a virtuous cycle. Sub-scale competitors will struggle to outdo this moat; and 3) we expect margin gains with scale. We estimate Star Health's GWP to see a 25% CAGR through FY25. Unit economics are extremely favorable - we expect ROE of 18%+ as claims normalize in a 66-67% band (after Covid-19 hump), capping combined ratio at 94-95%. We apply a DCF model to arrive at our Mar'23E TP of Rs1,135. We are of the view that investors should not be deterred by high valuations, which are rightfully anchored to STARHEALTH's nearly unassailable position in a high-growth industry.

Outlook

We initiate coverage on STARHEALTH with a Buy rating and a Mar'23 TP of Rs1,135 (+25% upside). Our TP implies a valuation multiple of 47x FY25E EPS and a FY25 P/GWP of 2.9x.