Stock To Buy: Motilal Oswal Suggest This Insurance Stock For 20% Returns, Retail Health To Clock 20-25% CAGR

Leading brokerage firm, Motilal Oswal Financial Services in its report published on 2 June 2022 has suggested investors buy the shares of Star Health & Allied Insurance Company Ltd. (Star Health Insurance) for a target price of Rs 840/share. The brokerage in its report has also stated, that the management expects the Retail Health segment to clock 20-25% CAGR over the next two-three years.

Stock Overview: CMP, Target price, Return, 52 Week Low & High

The stock today opened at Rs 718.15, the previous close was Rs 718.50. It is currently trading at Rs 705.25 (CMP), fell 1.84%. According to the brokerage's given a target price of Rs 840 and the CMP, the stock has the potential to gain 20% in the 12 Months. The 52 week low of the stock is Rs 583.60 and 52 week high is Rs 940. In the last 1 year, the stock has fallen near 15%.

Company's strength

"It aims to raise the sum assured by: 1) expanding the share of policyholders increasing their sum assured at the time of renewal in FY23 (7-8% currently), and 2) rising awareness of adequate sum assured," the brokerage has stated in the report.

According to the brokerage, "The company derives 15% of its GWP from specialized products. It has been the pioneer in specialty products such as newborn baby cover from day one; transplantation, where the donor is also covered; artificial insemination; among others. Senior citizen products, which constitute significant portion of specialized products, had a claim ratio better than the company level claim ratio in the pre-COVID period."

To improve its claim ratio, Star Health Insurance is:

1) taking action against hospitals

2) increasing tie-ups with hospitals, wherein it plays the role of claim scrutinizer

3) improve the share of its preferred hospital network with agreed pricing.

Financial Outlook

According to the brokerage's report, "Within the Group business, the company is looking to exit large corporates and focus only on SMEs, with a combined ratio of 95-96%. It aims to drive the SME segment at a significantly faster rate. The agency channel, with a share of 75-80%, is expected to reduce significantly in the next few years, led by aggressive growth in banca, digital, and other channels. The share of banca channel will increase to 8% in FY23 from 4% in FY22."

It added, "The management is confident of growing its Retail Health book at 20-25% CAGR, with a combined ratio of 92-94% and no further need to raise capital over the next two years. It aims to improve its OPEX ratio by 50-100bp annually and maintain the combined ratio between 92% and 94%, with an RoE of 16-18% over the medium term. Solvency ratio will improve to 1.95x by end of FY23, with the calculation shifting from claims to commissions.

Key Drivers

According to the brokerage, the key growth drivers will be:
1) Increased focus on lower-tier cities.
2) Tie up with new banca partners, with the aim to double its share to 8% in FY23.
3) Increased share of digital sales.

 

Buy for a target price of Rs 840/share

"We remain optimistic about the overall prospects of Start Health Insurance, backed by: a) strong growth in Retail Health, given its under-penetration; b) healthy earnings growth, led by normalization in the claim ratio; c) limited cyclicality risk (commercial lines and Motor Insurance have high cyclicality)," the brokerage has said.

It added, "We expect the gross premium to clock 25% CAGR and claim ratio to normalize ~64%, with a combined ratio of ~92% over FY22-24. We upgrade our FY23/FY24 earnings estimate by 6.6%/5.5% respectively driven by profitable business mix and maintain our Buy rating on the stock with a revised Target Price of Rs 840 (based on 40x FY24E P/E),"

Star Health & Allied Insurance Company Ltd.

Star Health and Allied Insurance Company Ltd is an Indian multinational health insurance company headquartered in Tamil Nadu, Chennai. The company commenced their operations in 2006, currently, with a market cap of Rs 40,422 Core of market capitalisation, it is a leading Health Insurer in the country. The company provides services in health, personal accident and overseas travel insurance, directly as well as through various channels like agents, brokers and online.

Star Health has excellent products to cater for everybody, be it individuals, families or corporates. The company work directly as well as through various channels like agents, brokers, and online etc., Star Health is also prominently into Bancassurance having a long-standing relationship with various Banks. Star Health has underwritten a gross written premium of Rs.6865 Cr during the FY 2019-20 and has built up a promising path with an appreciable net worth of Rs.1889 Cr, as of 31st March 2020. Currently, Star Health has 12800+ employees and 640+ branch offices all over India.

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal Financial Services. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decisions.