HDFC Life-Exide Life deal: An expensive acquisition, says CLSA; here's what other brokerage firms say

Analysts are of the view that the deal is not immediate stock price accretive for HDFC Life, but the sale of life insurance business removes an overhang from valuation’s perspective for Exide Industries.

Exide Life is relatively small in terms of overall APE (annual premium equivalent) at 8 percent of HDFC Life APE in FY21. HDFC Life’s management’s rationale is that the acquisition enhances its agency force and provides geographical diversification.

CLSA believes the deal is not a game-changer as distribution benefits are limited. An absolute valuation of Rs 7,000 crore is 2.6x Exide Life’s current EV, which is high for Exide’s stagnating APE over the past five years, as per CLSA.

“Since it is largely a stock swap deal paid through HDFC Life’s 5.6x P/EV multiple, the deal becomes marginally EV-accretive,” CLSA said.

It maintained an 'Outperform' rating with an unchanged price target of Rs 790 per share on HDFC Life.

For HDFC Life, the deal could expedite ramp-up of agency by around 35 percent, expand small-town presence, and lift APE by 8 percent, private market share by 130 bps and EV by 10 percent.

“Exide Life is less profitable and HDFC Life can benefit from scope to improve operating efficiency, agent productivity, and brand recall. Deal values Exide Life at 2.5x FY21 EV, a 55 percent discount to HDFC Life and 30 percent to other listed life insurers. The merged entity’s pro forma valuation moves a tad lower to 5.3x FY21 EV. The deal will lead to dilution of 4.1 percent for existing shareholders,” Jefferies said.

Meanwhile, HDFC Life’s solvency is 203 percent and that of Exide Life is 219 percent. Once Exide Life becomes a 100 percent subsidiary of HDFC Life, its solvency would fall to 180-190 percent, but upon completion of the merger, solvency might move toward 190-200 percent, the brokerage firm said.

It maintained 'Buy' rating on HDFC Life and raised the target price to Rs 850 from Rs 800.

Nomura sees a possibility of operating parameters improving materially but thinks valuation of 2.5x trailing EV is not justified for such a sub-par business especially given that weaker players have been struggling.

“Peers like SBI Life/ICICI Prudential Life trade at 3.2x/3.4x trailing EV, but have strong brand positioning, largest banca distribution and significant scale advantage. That said, HDFC Life’s strong currency (trading at 5.1x trailing EV) does permit the company to pay a premium for such an acquisition especially given the small size of the acquisition (only 4.6% of its market cap), in our view,” Nomura said.

"We have reservations on the quality of the business and in that sense, a 2.5x P/EV looks like an expensive multiple in our view," Macquarie said.

Meanwhile, Citi states that the sale of life insurance business removes an overhang from valuation’s perspective for Exide Industries.

Investors had concerns on capital deployment in unrelated business, Citi said, adding that at 2.5x FY21 embedded value, the valuation received is attractive.

Citi maintains Exide Industries as top auto ancillary pick and raised target multiple to 21x from 18x. It also maintained a Buy call and raised TP to Rs 260 per share.

The share price of HDFC Life Insurance Company declined more than 3 percent after the announcement of the deal, while that of Exide Industries rallied over 6 percent on Friday.

HDFC Life stock price extended the fall on Monday and traded 0.42 percent lower at Rs 731.40 apiece at 11:50 am. Exide Industries shares were trading 0.50 percent higher at Rs 190.50.