After losing half of its investor wealth between December 2021 to July 2022, things are looking up for Rakesh Jhunjhunwala-backed Star Health and Allied Insurance Company. The stock has risen 53 percent just in the month of July.
Before this, the company lost 50 percent after hitting its all-time high of ₹940 on its listing day in December. It hit its all-time low of ₹469 on July 1, 2022. Since then, the stock has been on an uptrend surging to around ₹720 currently.
Star Health is the second biggest stock in Jhunjhunwala's portfolio after Titan in value terms. As per the shareholding data till June 2022, He and his wife Rekha Jhunjhunwala together held a 17.49 percent stake in the firm. Rakesh holds 8.28 crore equity shares or 14.39 percent of the company while his Wife Rekha holds 1.78 crore equity shares or 3.10 percent in Star Health.
Post the major surge in July, mainly on the back of strong earnings, analysts see strong prospects ahead for the firm. Brokerages have 'buy' calls on the stock with a potential upside of up to 20 percent as they remain optimistic about the overall prospects of the insurance company.
In the June quarter, the company reported a stellar set of earnings with the company posting a profit of ₹213.24 crore against a loss of ₹209.78 crore in the year-ago period. Its total income also climbed 20.46 percent to ₹2,809.01 crore in Q1 versus ₹2,331.90 crore in the corresponding quarter of the previous fiscal.
Domestic brokerage house HDFC Securities, recently, initiated coverage on the stock with a 'buy' call and target price of ₹860 per share.
"Capitalising on an early-mover advantage and significant regulatory arbitrage, the company is positioned as the largest standalone health insurer (FY22: 33 percent market-share), anchored on an extremely strong and highly productive agency-dominated distribution network and retail-dominated business mix," said HDFC. Despite potential regulatory convergence, it believes that Star Health has meaningful headroom to pivot to a high-quality franchise, translating into a better quality of earnings.
The brokerage is positive on the insurance firm 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 percent premium to ICICI General Insurance on the back of Star Health's inimitable distribution network, 90 percent retail mix offering secular growth, and strong moats derived from its vintage and scale," it stated.
Meanwhile, another brokerage ICICI Securities is also bullish on the stock and has raised its target price to ₹858 for Star Health after Q1 earnings from ₹700 earlier.
"We factor 19 percent premium CAGR between FY22-24E, a combined ratio of 95 percent and 94 percent and investment yield of 7 percent and 7.5 percent for FY23E and FY24E, respectively. We have upgraded our FY24 earnings to factor the renewed confidence in terms of earnings potential seen in the company's product and distribution strategy," said the brokerage.
Motilal Oswal also remained optimistic about the overall prospects for Star Health, backed by strong growth in Retail Health, given its under-penetration; healthy earnings growth, led by normalization in the claims ratio; limited cyclicality risk; and healthy RoE profile (15-17 percent over the medium term).
“In 1QFY23, although claims were higher than our expectation on the back of COVID-related medical inflation, its Retail Health business continued to grow better than the industry. While we broadly retain our FY24 estimate, we have cut our FY23 EPS by 9 percent to factor in higher ESOP costs,” it said. The brokerage maintains a buy call on the stock with a target price of ₹850.
HDFC expects Star Health to deliver revenue and PAT CAGRs of 32 percent and 38 percent over FY20-FY24E and healthy RoEs (return on equity) in the range of 10 percent and 16 percent in FY23E and FY24E, respectively.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.