On Wednesday, Citi reiterated its Sell rating on Star Health & Allied Insurance (STARHEAL:IN), maintaining a price target of INR575.00. The firm observed that the company's profit after tax (PAT) fell by 11% year-over-year, which was 32% below Citi's expectations, based on a low comparative base from the previous year.
The underperformance was attributed to weaker underwriting results that impacted profitability, despite a positive surprise in investment income, which yielded 8.7% in the second quarter of the fiscal year 2025 (2QFY25), compared to 7.4% in the preceding quarter and the same quarter of the previous year.
Star Health's combined ratio worsened, reaching 103% in 2QFY25 from 99.2% in 2QFY24. This deterioration was primarily due to a 410 basis points year-over-year increase in the net incurred claims ratio, which was 330 basis points higher than Citi's projections. The commission and operating expense ratio saw a marginal increase of 25 basis points year-over-year.
Citi analysts pointed out that the cost ratio is influenced by several factors, including increased strain from new business and a shift in channel mix, as well as a greater than 25% year-over-year growth in retail health and new business segments.
Additionally, a higher ceding ratio led to favorable inward commissions. Adjusted for the change in ceding strategy, the net commission and operating expense ratio is estimated to have shifted by approximately 215-235 basis points, with the ceding ratio at 9.1% in 2QFY25, up from 5% in 2QFY24.
The firm announced that it will review its estimates and rating following the earnings call scheduled for the next day at 8:30 am IST, but for the time being, the Sell rating remains in place.
InvestingPro Insights
Recent data from InvestingPro sheds additional light on Star Health & Allied Insurance's financial position. According to InvestingPro Tips, the company is currently trading at a high earnings multiple and a high P/E ratio relative to its near-term earnings growth. This aligns with Citi's Sell rating and suggests that the stock may be overvalued at its current price.
Furthermore, InvestingPro data indicates that Star Health suffers from weak gross profit margins, which could be contributing to the underwriting challenges mentioned in Citi's analysis. This weakness in profitability is particularly concerning given the company's status as a prominent player in the Insurance industry.
On a positive note, analysts predict that the company will be profitable this year, and it has been profitable over the last twelve months. However, investors should be aware that Star Health does not pay a dividend to shareholders, which may impact its attractiveness to income-focused investors.
For readers seeking a more comprehensive analysis, InvestingPro offers 5 additional tips for Star Health & Allied Insurance, providing a deeper understanding of the company's financial health and market position.
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