Company Name – Star Health & Allied Insurance Limited (Star Health) Current Share Price – INR 633 (March 9, 2022) Market Cap – INR 36,457 cr |
1. What is interesting about the stock?
Remember this epic scene from the cult hit Munnabhai MBBS where the lead Munna is complaining of how the patient or his family has to complete all the tedious formalities to get admitted. Many Bollywood movies have used the medical system to justify plot developments over the years including the evergreen trope of a medical emergency forcing the hero to turn to crime to be able to pay for the expensive treatment for his loved ones.
Although all this may look cliched with the complaints against the medical system in most of these movies being exaggerated to fit the plot requirements, it does reflect the basic truth that emergency medical expenses can be a big financial burden and not being able to get the medical process started due to money or other issues like not filling in the form in time are indeed a reality everywhere. So what is the solution to these issues?
These issues are systemic and big medical fees are a problem that every nation is looking to tackle. The solution that everyone is looking for here is good health insurance. Good Health insurance enables seamless processing at medical centers which can even be cashless and paperless at partnered hospitals and also help prevent the financial shock from medical emergencies derailing the holder’s finances.
In comes Star Health.
Star Health is the biggest standalone health insurance provider in India with a 15.8% overall market share & 32% retail health insurance market share as of Q3FY22.
The Company has 786 branches with an agent pool of over 5.3 lacs as of Q3FY22, which is the largest in the industry and is almost 3 times the agent pool of the next nearest standalone health insurer. The Company’s policies are mainly sold and distributed through individual agents who accounted for 78.9% of Gross Written Premium (GWP) in FY21.
The Company’s major focus is on retail health insurance with the segment accounting for 89.3% of GWP in FY21 while group health insurance accounted for the remaining 10.7%.
The Company has 3 main kinds of products in the retail health insurance space which are:
Family Floater products in which the sum insured covers the entire family on the payment of a single annual premium
Individual products which are tailored to the needs of the individual
Specialized products which focus on customers with pre-existing conditions after taking accounting for the associated risks
The Company has over 12,000+ hospitals in its partnership network with pre-agreed arrangements. 65% of these partner hospitals accounted for 62% of total cashless claims paid out in FY21.
The Company also has a wide distribution network of partner institutions including many banks like PNB, BoB, Federal Bank, etc. and fintech platforms like Phonepe, Paytm, Policybazaar, and many others.
Source: Investor PPT Q3FY22
The Company is promoted by WestBridge AIF and Rakesh Jhunjhunwala who account for 41% & 14% of the Company shareholding respectively.
Industry Overview
The health insurance penetration in India is very low at only 0.4% of nominal GDP vs 4.1% in USA & 2% for the World Median in 2019.
Around 73% of the total healthcare expenditure in India is private with 63% of the total coming from out-of-pocket expenditure. This number is also very high when compared to the world average of 18% and USA which is at 11%.
Source: RHP
According to CRISIL, Gross Direct Premium for health insurers is expected to increase at a CAGR of 18% from FY21 to FY25 to reach INR 1.1 trillion in FY25.
Source: RHP
Retail health insurance is expected to rise at the fastest pace among all the categories in the health insurance space at 23% CAGR between FY21 - FY25.
Source: RHP
Many factors are expected to lead to this rapid rise in the industry including
Govt Health insurance schemes like:
Pradhan Mantri Suraksha Bima Yojana (PMSBY)
Pradhan Mantri Jan Aarogya Yojana (PMJAY)
Digital innovation leading to increasing penetration of the insurance industry
Advances in data governance and predictive planning leading to better underwriting
Rising income levels and life expectancy
Advancements in medical diagnosis and treatments
There are 17 players which account for 93% of the health insurance premium collected in FY21 of which New India Assurance is the largest player with a 18% market share of the gross direct premium, while Star health Insurance is the largest private player with a market share of 16%.
Source: RHP
The closest listed peers of Star Health are:
New India Assurance
ICICI Lombard
Key MOATs
The biggest strength for Star Health is its strong presence in the retail health insurance space, where it has over 16% market share and is close to the largest Govt player, New India Assurance, which is at 18%. Because of its private nature, the Company can be expected to capture the rapidly expanding health insurance market faster than its government rivals.
Another big strength of the Company is its large network of partner hospitals, which enables it to settle claims at a lower level and negotiate better rates for services from its partners which is good for its operations. This also led to high customer stickiness with 98% renewals in FY21 in terms of GWP.
The third biggest strength of the Company is its singular focus on health insurance alone. Standalone health insurers have shown a good track record of growth greater than government insurers and private general insurers in the past 5 years with standalone players growing 33% vs. Govt players’ growth of only 11% and private players’ growth of only 8% in FY21.
2. Key Historical Financials
The Company has grown its GWP at a 32% CAGR from FY19-21 and has seen retail GWP grow at a similar CAGR of 32.5% in the same period. The Company has also seen a healthy CAGR of 29.6% in the group health insurance segment in the same period.
The losses in Q3FY22 in particular were much higher than Q3FY21 mainly due to resurfaced rejected claims of Rs 235 cr due to a COVID specific claim settlement rule change by IRDAI. The Company also saw additional provisioning and one time items like listing fees and others which also contributed to the big loss figure in Q3.
3. What is my view on Company valuation?
Star Health saw a tepid IPO in Dec 2021 with a total subscription of 0.79 times and provided a listing loss of 6% on listing at INR 848 over its IPO price of Rs 900.
The stock has since then gone down along with the overall market and currently trades at Rs 631, which is 30% down from its IPO price.
The Company made a loss after tax in the year so far due to various adjustments including large one-time expenses and provisions.
Star Health is expected to trade at a premium to industry ratios given its market leader status in its operating categories, especially retail health insurance.
The growth of the Company is expected to maintain its current momentum of exceeding the retail health insurance segment which is expected to have a CAGR of 23%. We can expect the Company to maintain its current growth trajectory with a CAGR of 25-30% in GWP, over the next few years, with the company already growing 27% YoY in 9MFY21.
The Company’s H1FY22 claims ratio of 88% is high because of the Covid impact. I expect that to normalize by FY23.
Star Health looks good for long-term investment and should be evaluated by investors.
However, the Company is expected to end the year (FY22) at a loss and it will be hard to pinpoint a good entry price or valuation right now.
4. What are the risks to the investment analysis?
Risks to the analysis are:
There isn’t any concept of intellectual property protection for insurance products like banking products, and every innovator in this space has a limited first-mover advantage before the new product is replicated by the rest of the industry. Thus rivals with access to greater resources like ICICI Lombard and HDFC Ergo have the potential to overtake the company with time and effort.
Health insurance is a sector where the number of claims tends to spike a lot in times of any kind of life or health crisis and thus any natural or health disaster can be very detrimental to the company’s operations. This is also the case why the company has been at a loss during FY21.
Health insurance is a much more difficult product to sell as compared to life insurance, which is being sold as an investment product. India has low healthcare costs except in case of emergencies or life threatening situations. So, this makes selling health insurance more difficult than other types of insurance.
About the Author
I have over 6 years of experience in the Investment sector and have been an active prop trader in European Bond Futures in the past. Currently I am working as head of Research at Smart Sync Services where we are working on simplifying and expanding financial and investment knowledge to make the investment world as accessible for everyday investors as much as possible.
I graduated from the Master of Finance Program from Cambridge University in 2016 after completing my Bachelor of Engineering program from Jadavpur University, Kolkata in 2011.
I am an insignificant public investor & have avid interest in following emerging trends both in technology and other fast evolving sectors. I am also a lifelong learner and relish the chance to learn something new all the time.
Disclosure
I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.