Analysts said smaller life insurance companies are struggling and many of them are up for sale. As there are not many suitors for firms without sizeable bancassurance distribution, the premium valuation paid for Exide Life looked unwarranted, they said and added that HDFC Life would have done better growing organically as synergies from the acquisition would anyway take 18-24 months to materialise.
That said, brokerages still hold a positive view on HDFC Life, as the valuation premium of Rs 4,000 crore over the embedded value (EV) of Exide Life is insignificant and accounts for only 3 per cent of HDFC Life’s current market capitalisation. It may, though, delay industry consolidation, they warned, adding that sectoral leaders would now be keen to pay such a premium valuation for weaker franchises.
At nearly 2.5 times June 2021 EV, the valuation paid for Exide Life far exceeds the quality of franchise, said and added that smaller players without any meaningful bancassurance distribution like Exide were already battling to grow and manage high fixed costs.
“Exide Life has been struggling on the expense front and its retail business has recorded poor persistency. In this context, the 2.5 times P/EV (June 2021) paid to Exide Life appears to be at a significant premium over its intrinsic value. The three listed peers of HDFC Life currently trade at 3.5 times June 2021 EV. It is worth noting here that these listed peers have a very strong brand, massive economies of scale, formidable bancassurance distribution and sustained high operating return EV,” Emkay said.
HDFC Life will play Exide a cash consideration of Rs 726 crore and will issue HDFC Life shares at Rs 685 per share for the rest of the amount. The deal would add 10 per cent to HDFC Life’s EV while the stock consideration would lead to a 4 per cent dilution.
Prabhudas Lilladher said Exide’s acquisition has minimal compliments to HDFC Life given the former’s smaller size, loss of market share and low immediate margins and opex synergies compared with 2.5 times multiple to current EV.
The acquisition does provide HDFC Life access to the southern geography, better agency business (60 per cent share for Exide – 38 per cent of HDFC Life) and better protection mix (11 per cent mix). Exide also has better solvency ratio than HDFC Life and a large co-operative banca partnership.
“But lower persistency of less than 75 per cent against HDFC Life’s 85 per cent, lower margins and lower scale (60 per cent higher cost than HDFC Life) do not compliment HDFC Life in a very big way,” Prabhudas said.
YES Securities, however, believes the acquisition makes sense. It said Exide Life has significant presence in the Tier 2 and 3 centres, which contribute more than 60 per cent to their business. Exide Life also has significant presence down south, where HDFC Life’s current share of agents is 26 per cent.
“The synergies would be realised over a period of 18-24 months. New business margin will improve as operating leverage and product mx changes kick in. There is also slight scope to improve Exide Life’s agent productivity and their persistency. Regarding cost, Exide Life variable cost is largely in line and their fixed cost is sub-optimal due to lack of scale. HDFC Life will start selling their products via Exide Life distribution. While Exide Life pre-overrun new business margin is in line with that of HDFC Life, their cost ratio is about 60 per cent higher, which will benefit as scale kicks in,” YES Securities said.
The brokerage has an ‘add’ rating on HDFC Life and a revised target price of Rs 783, valuing HDFC Life at 4.3 times FY23 P/EV. The brokerage, however, prefers ICICI Prudential Life in the life insurance space.
Prabhudas Lilladher has a price target of Rs 734 while Emkay finds the stock Rs 870 worthy.
The stock had 23 ‘buy’ calls, 11 ‘hold’ and 2 ‘sell’ recommendations as of Saturday. In the last one week, it has added one ‘buy’ call. The stock has a 12-month median price target of Rs 777.5 based on the recommendations of 36 analysts.
On Friday, the scrip closed at Rs 734.45, down 3.21 per cent, suggesting up to 6 per cent potential upside from here on.
