HDFC Life buying Exide Life is “no value accretive” deal

HDFC Life buying Exide Life is “no value accretive” deal

HDFC Life Insurance Company buying Exide Life Insurance Company is an expensive and no value accretive deal, which will not be a game changer as distribution benefits are expected to be limited.
Last week, HDFC Life had announced the acquisition of 100% of the share capital of Exide Life Insurance Company for Rs 6,687 crore. Of this, Rs 725.97 crore will be payable in cash and the balance by way of issue 8.70 crore equity shares at a price of Rs 685 per share to Exide Industries.

The process for the merger of Exide Life into HDFC Life will be initiated on completion of the acquisition.
The deal is not immidieate 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% of HDFC Life APE in FY21.
HDFC Life’s management’s rationale is that the acquisition enhances its agency force and provides geographical diversification.
The point of contention here is, 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.

For HDFC Life, the deal could expedite ramp-up of agency by around 35%, expand small-town presence, and lift APE by 8%, private market share by 130 bps and EV by 10%.
Meanwhile, HDFC Life’s solvency is 203% and that of Exide Life is 219%. Once Exide Lifebecomes a 100% subsidiary of HDFC Life, its solvency would fall to 180-190%, but upon completion of merger, solvency might move toward 190-200%.
However, the private sector life insurance player remains a long term investment candidate given its insolvency ratio coupled with the possibility of further improvement in its operating parameters.

Disclaimer –
This document is meant for the recipient only for use as intended and not for circulation. This document should not be reproduced or copied or made available to others. The information contained herein is from the public domain or sources believed to be reliable. While reasonable care has been taken to ensure that information given is at the time believed to be fair and correct and opinions based thereupon are reasonable, due to the very nature of research it cannot be warranted or represented that it is accurate or complete and it should not be relied upon as such. Also above note is not a recommendation to Buy or SELL and is only a view based on facts and figures and we will be in no way responsible for any losses incurred by anyone who uses this information to either trade or invests securities mentioned herein.