Buy Star Health and Allied Insurance Company, target price Rs 1,040: Emkay Global Financial Services

Emkay Global Financial Services has buy call on Star Health and Allied Insurance Company with a target price of Rs 1,040.

Star Health and Allied Insurance Company, incorporated in the year 2005, is a Small Cap company (having a market cap of Rs 40,646.25 crore) operating in Financial Services sector.

Investment Rationale

Management believes that in the absence of any further Covid-19 wave, Star Health's performance in FY23 will reflect normalcy in business, with the loss ratio at 65% and CoR at 94-95%.

Benign hospitalization needs during the Omicron wave led to an improvement in claim frequency, while the gradual withdrawal of Covid-19 compliance-led overheads on non-Covid procedures eased claims severity. Easing claims frequency and severity should drive a quicker improvement in the claims ratio.

On capital, management does not see the need for any capital raise in the next two years, as once the profitability normalizes, the required solvency margin will move to premium from claim, and the available solvency margin will benefit from net income accrual. Beyond this, a risk transfer based reinsurance treaty may be considered as another alternative to manage capital. If at all needed, Star Health can resort to raising sub-debt as well.

Overall, Star Health remains an attractive story in a sunrise sector. 1-2 quarters of profitable growth delivery will likely lead to a material outperformance of Star Health's shares, in our view. The brokerage reiterates Buy with our Mar'23 TP of Rs1,040, implying an FY25E P/E of 46x and P/GWP of 2.8x.

Financials
For the quarter ended 31-12-2021, the company has reported a Standalone Total Income of Rs 2711.01 crore, up .07% from last quarter Total Income of Rs 2709.24 crore and up 77.07% from last year same quarter Total Income of Rs 1531.07 crore. Company has reported net profit after tax of Rs -578.37 Crore in latest quarter.

Promoter/FII Holdings
Promoters held 58.9 per cent stake in the company as of 31-Dec-2021, while FIIs owned 35.03 per cent, DIIs 2.32 per cent.