Superstar Plan And Digital Expansion Set To Drive Revenue Growth And Boost Profitability

Key Takeaways

• Innovative insurance products and digital expansion are set to drive revenue growth and enhance customer engagement, lowering acquisition costs.
  
• Strategies to tackle medical inflation and enhance claims processing aim to boost net margins and profitability through price adjustments and technology investments.
  
• Increased combined ratio and loss ratios, alongside claims severity, cyber expenses, and competitive pricing, could pressure Star Health's profitability and net margins.

Catalysts

Provides health insurance products in India.

• The company is introducing innovative and affordable insurance products, such as the new modular Superstar Plan, aimed at personalization and long-term customer retention, which is anticipated to drive future revenue through enhanced product offerings and customer engagement.
  
• There is a strategic expansion in digital channels, with significant growth from direct-to-consumer sales and online partnerships expected to improve revenue and possibly net margins due to lower acquisition costs associated with digital sales.
  
• Star Health's agency vertical is expanding, with a 17% increase in fresh gross written premium (GWP), which is likely to bolster revenues as this channel grows and activates more agents.
  
• The company plans to combat medical inflation and high claims through calibrated price increases in products and enhanced claims processing efficiencies, which should lead to better net margins and profitability in the coming quarters.
  
• Investments in wellness initiatives and technology, such as telemedicine and fraud detection, are expected to reduce claims costs over time, thereby improving net margins.

Star Health and Allied Insurance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Star Health and Allied Insurance's revenue will grow by 19.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.7% today to 5.8% in 3 years time.
• Analysts expect earnings to reach ₹14.9 billion (and earnings per share of ₹25.5) by about January 2028, up from ₹8.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹16.8 billion in earnings, and the most bearish expecting ₹11.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.2x on those 2028 earnings, up from 32.8x today. This future PE is greater than the current PE for the IN Insurance industry at 13.0x.
• Analysts expect the number of shares outstanding to decline by 0.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.15%, as per the Simply Wall St company report.

Star Health and Allied Insurance Future Earnings Per Share Growth

Risks

• The company's combined ratio has increased, reaching 103% in Q2 FY '25 compared to 99.2% in Q2 FY '24, indicating higher costs relative to premiums, potentially impacting net margins.
  
• Loss ratios have risen significantly due to increased frequency and severity of claims, particularly medical claims, which could adversely affect earnings if the trend persists.
  
• The company's reliance on increasing its portfolio through higher group business, which typically has higher loss ratios, may pressure the profitability and net margins unless adequately managed.
  
• Challenges with medical inflation and heightened competitive pricing in group health and corporate business could hinder revenue growth and squeeze profit margins.
  
• The impact of a recent cyber incident and the required enhancement of cybersecurity measures entail additional expenses, which may affect the net margins and profitability.

Valuation

• The analysts have a consensus price target of ₹600.59 for Star Health and Allied Insurance based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹750.0, and the most bearish reporting a price target of just ₹490.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹257.8 billion, earnings will come to ₹14.9 billion, and it would be trading on a PE ratio of 33.2x, assuming you use a discount rate of 12.2%.
• Given the current share price of ₹481.35, the analyst's price target of ₹600.59 is 19.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.