Street puts ‘expensive deal’ tag on HDFC Life’s acquisition of Exide Life

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HDFC Life and Exide Life shares were buzzing on Friday, September 3rd after HDFC Life announced it will acquire a 100% stake in Exide Life Insurance for Rs 6,687 crore. The deal will help HDFC Life to grow its proprietary business further. Post the conclusion of the deal Exide Industries will hold a 4.1% stake in HDFC Life with a lock-in of one year.

Merger rationale

The acquisition will add approximately 40% to the topline of HDFC Life Agency (based on FY21 nos.) and 36,700+ agent base as of 30th June 2021. That apart it will also get access to South India, where Exide Life has a strong presence especially in Tier 2 and Tier 3 locations.

The acquisition will enable a stronger product suite, wider distribution network and more service touchpoints for the customers. Whereas the shareholders will benefit from the synergies by merging of both businesses as they will lead to improving new business margins via operating leverage and product mix optimisation.

“We believe that this amalgamation can result in value creation for customers, employees, shareholders and distribution partners. It gives us an opportunity to realise synergies arising out of complementary business models, and further bolster our proprietary distribution network,” said Vibha Padalkar, MD & CEO, HDFC Life.

Expensive deal

According to Phillip Capital, the deal values Exide life at a valuation of 2.5x of current EV (enterprise value) at a 30% discount to listed players (excluding HDFC Life). Despite listed players having a much larger scale, strong bancassurance tie up and strong brand image. Further Exide life like other smaller players has been struggling due to poor persistency (13th month at 75%), lower margins (higher fixed cost leading to high cost overrun) and lower growth (1% CAGR in 3 years). A large part of synergies will come because of the scale that HDFC Life will bring.

“The transaction values Exide Life at 2.5x Jun’21 reported EV (enterprise value), which appears expensive in the context of Exide life’s three-year premium and EV CAGR (compounded annual growth rate) of ~10% and 8%, respectively,” said Motilal Oswal in a note.

Valuation

Prabhudas Lilladher is of the opinion that Exide’s acquisition has minimal compliments to HDFC Life given its smaller size, it has been losing market share and immediate margins & OPEX synergies are on the lower side which will have to be worked upon, compared to 2.5x multiple to current EV. The deal adds 10% to HDFC Life’s EV, while stock consideration creates a 4% dilution. The brokerage firm has retained its price target of Rs 725 per share based on 3.6x Sep-23 EV.

“At the current price, the stock trades at an FY23 P/EV ratio of 4.1x. Strong brand equity, well‐diversified distribution capabilities, and continued emphasis on product and technological innovation have made HDFC Life one of the most profitable life insurance franchises. We value the stock on an FY23 P/EV multiple of 4.3x to arrive at a target of Rs 775, implying a VNB (value of the new business) multiple of 40x,” stated Phillip Capital.

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