Stock to buy: This mid-cap stock is likely to rise 22%, yielding 48.86% in 1 month
Outlook and stock returns
Yesterday the company’s share fell by 5.01% and closes at Rs 709.75 apiece, today it is open at Rs 709.75 apiece and is 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 each recorded on July 1, 2022 and the 52-week high is 940 each recorded on December 10, 2021, respectively. The stock’s ROE is negative at -12.95%. The PE ratio is negative 66.20 and the PB ratio is 5.09. The stock was listed on the stock exchange last year.
Stocks in terms of returns have done well over the past month, returning 49.75%. Over the past week, it has increased by 1.13%. In 3 months, it gave a negative return of 0.22%
Unparalleled distribution network
With an unrivaled granular agency network (33% market share, +20pps over FY14-FY22), STARH Health is expected to increase retail GDPI to 21% CAGR over FY22-32E. Best-in-class agent productivity highlights seasoned agency channel (agent tenure > 2 years). As new agents mature, mixed productivity would further increase, driving retail GDPI growth and market share gains.
High adhesion a virtuous circle
Granularity and personal connection were the two key pillars for high stickiness and renewal rates (FY22: ~95%). We believe that a substantial increase in order books is the primary driver for retaining and growing high-performing, high-productivity agents. However, we also highlight the need for STARHEAL to fix its claim rejection rate to improve its customer experience, a long-term catalyst for stickiness.
Multiple levers to improve COR
Having operated in a narrow “loss rate” band (pre-COVID), STARHEAL’s high loss rates (FY22: 87%) should gradually improve with a normalization environment at 65.6-66.5% compared to the FY23E-24E. The non-linearity of personnel expenses should improve the operating ratio by 131 basis points (% of NTP); this, coupled with reduced agency fees in line with long-term growth trends, is expected to improve COR to 94.1% by FY32E.
HDFC Securities suggests buying for a target price of Rs 860 each
The brokerage said: “We are starting with a buy rating on the stock and a target price of Rs 860 assigning a derived DCF of 53x FY24E EPS (10x Mar-24E P/ABV) due to its network formidable and entrenched distribution channel with strong customer traction and predictable secular growth prospects Our target PE multiple implies a 65% premium to ICICIGI through STAR Health’s inimitable distribution network, a mix of 90% retail offering secular growth and strong moats derived from its vintage and scale.”
“Despite potential regulatory convergence, we believe STAR Health has significant leeway to pivot to a high-quality franchise, translating into higher quality of revenue, to maintain its long-term lead. We expect STAR Health to generate APAT revenue/CAGR of 32%/38% in FY20-24E and healthy ROE in the range of 10%/16% in FY23E/24E” , the brokerage firm said. said.
According to HDFC Securities, the main risks are:
1. Disproportionate reliance on agency channel.
2. Still mediocre loss experience.
3. Slower than expected growth impacting loss ratios.
4. Growing competitive intensity in compensation products.