Stock To Buy: This Mid Cap Stock Likely To Surge 22%, Delivered 48.86% Return In 1 Month

HDFC Securities is bullish on Star Health & Allied Insurance Company Limited and suggests buy the stocks of the company for an atrget price of Rs 860 apiece. If the stocks of the company are purchased at the current market price, investors can expect potential gains of 22%.

According to the brokerage firm Capitalising on an early-mover advantage and significant regulatory arbitrage, STAR Health is positioned as the largest standalone health insurer, anchored on an extremely strong and highly productive agency-dominated distribution network and retail-dominated business mix.

Star Health is a mid-cap general insurance company having a market capitalization of Rs 40,888.71 crore.

Stock Outlook & Returns

Yesterday, the share of the company tanked 5.01% and ends up at Rs 709.75 apiece, today it is opened at Rs 709.75 apiece, and currently trading at Rs 705.25 apiece, trading at Rs 236.20 above the 52-week low and Rs 234.75 below the 52-week high.

The stock's 52-week low is 469.05 apiece recorded on 01 July 2022 and the 52-week high is 940 apiece recorded on 10 December 2021, respectively. Stock's ROE is negative -12.95%. The PE ratio is negative 66.20 and the PB ratio is 5.09. The stock was listed last year on the exchange.

The stocks in terms of returns performed well in the last 1 month, given 49.75% returns. In the last 1 week, it moved up by 1.13%. In 3 months, it has given a negative return of 0.22%

Unrivalled distribution network

On the back of an unrivalled granular agency network (33% market-share, +20pps over FY14-FY22), STARH Health is slated to grow retail GDPI at 21% CAGR over FY22-32E. Best-in-class agent productivity underlines seasoned agency channel (agent vintage >2yrs). With seasoning of the new agents, blended productivity would further inch up, driving retail GDPI growth and market share gains.

High stickiness a virtuous cycle

Granularity and personal connect have been the two key pillars for high stickiness and renewal rates (FY22: ~95%). We believe that substantial back-book accretion is the key driver to retaining and growing high vintage, high-productivity agents. However, we also highlight the need for STARHEAL to fix its claims rejection ratio in order to improve its customer experience, a long-term catalyst for stickiness.

Multiple levers to improve CORs

Having operated in a tight "loss ratios" band (pre-COVID), STARHEAL's elevated loss ratios (FY22: 87%) are expected to gradually improve with normalising environment to 65.6-66.5% over FY23E-24E. Non-linearity in staff costs is expected to improve opex ratio by 131bps (% of NWP); this, coupled with dialling down of agency commissions in line with long-term growth trends, is expected to improve CORs to 94.1% by FY32E.

HDFC Securities suggests buy for a target price Of Rs 860 apiece

The brokerage said, "We initiate with a BUY rating on the stock and a target price of Rs 860 assigning a DCF derived 53x FY24E EPS (10x Mar-24E P/ABV) on account of its formidable and entrenched distribution network with high customer stickiness and a predictable secular growth outlook. Our target PE multiple implies a 65% premium to ICICIGI on the back of STAR Health's inimitable distribution network, 90% retail mix offering secular growth, and strong moats derived from its vintage and scale."

"Despite potential regulatory convergence, we believe that STAR Health has meaningful headroom to pivot to a high-quality franchise, translating into better quality of earnings. Having aced the agency channel, we argue that the company now needs to build a credible banca strategy in order to sustain its lead in the long term. We expect STAR Health to deliver revenue/APAT CAGRs of 32%/38% over FY20-FY24E and healthy RoEs in the range of 10%/16% in FY23E/24E," the brokerage said.

Key risks

According to the HDFC Securities, the key risks are:

1. Disproportionate dependence on agency channel.

2. Continued poor claims experience.

3. Slower-than-expected growth impacting loss ratios.

4. Rising competitive intensity on indemnity products. 

Disclaimer

The stock has been picked from the brokerage report of HDFC Securities. Greynium Information Technologies, the Author, and the respective 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 decision.