Perspectives

Why have we continued to buy Star Health

The price of Star Health corrected significantly from our first purchase price.  We have continued to buy on the way down and are now at an 8% position weight.

Original investment thesis

The industry provides a rare combination of “win-win-win” business with growth longevity, a strong moat and healthy ROEs.

• Consumers: It’s a must have product for consumers as Health issues can bankrupt families and should have priority in the Consumer wallet.
• Regulator: Wants more insurance coverage and hence should not grudge the industry a ~15% accounting ROE.  There isn’t enough history in India for companies to model claim ratios over time (unlike Life Insurance where LIC has mortality tables).  So the regulator permits price increases when product claim ratios becomes adverse.   Star just announced an average 25% price increase in its flagship product.
• Company:  Can grow premium at 15-18% CAGR for a decade (1.5%% natural increase in population growth, enhanced retail health insurance penetration (currently 4%), 6-7% medical inflation and 5-10% increase in covers with rise in Incomes) at 16-18% accounting ROEs. 

Investment thesis on Kama Holdings

Kama Holdings is the Holding company of SRF. Please read this important disclosure. ¹

Summary thesis:

• SRF will grow profits at 15%+ over the next decade riding market opportunity and leveraging its strong competitive position. However, we expect valuation multiples for SRF to correct over time as mean reversion takes place and when growth slows down.
• The Holding company discount for Kama has expanded over the last 5 years.  This should narrow over-time as the mispricing vs peers gets corrected.
• Hence, buying Kama is akin to buying SRF at a margin of safety.   If the discount on Kama does not narrow, we should earn similar returns as one would earn on owning SRF.  However, if we are right, we should earn a substantial kicker above returns earned by owning SRF.

Investment thesis on MAN Industries

We invest primarily with an “ownership mindset” (~90-95% of portfolio).

• Businesses that have a long runway for growth as they are benefitting from secular tail winds.
• A strong competitive edge reflected in industry leadership positions.
• Are run by disciplined management teams aligned with interests of minority shareholders. 

However, ~5-10% allocation is kept for “Special Situations”.

• Companies that currently don’t fit our core approach but offer highly asymmetric risk/rewards.
• The underlying price is at a significant discount to the fair value of the business, which we don’t think is justified.
• A trigger for re-rating is visible.  

Perspective on Life Insurance companies post-budget

Share price of Life Insurance companies have fallen 8-16% in last 2 days.  

Life Insurance companies get almost 25-30% share of their total premiums from long duration savings products which enjoy tax benefits under Section 10 (10D) which make them superior products vs Debt instruments when measured on a post-tax basis.

The budget had 2 announcements with implications for Life Insurance companies:

• Modifications in Section 10 (10D) for premiums over 5 Lacs/year – if the premium paid on Savings policies (excluding ULIPs) exceed INR 5L in a year, then the income earned from those policies will now be taxable (except in case of death benefit).  
• The FM signalled intent to nudge individuals to migrate to the new tax regime under which there will be higher exemption limits, but Section 80C tax benefits will be withdrawn.