Update on Indian Equity Market:
On Thursday, NIFTY ended at 17,378 (+0.3%). Among the sectoral indices, REALTY (+3.2%), IT (+1.5%), MEDIA (+1.3%) ended higher, whereas PRIVATE BANK (-0.5%), BANK (-0.5%), and FINANCIAL SERVICES (-0.3%) ended lower. Among the stocks, WIPRO (+5.0%), HCL TECH (+2.7%), and INFOSYS (+1.8%) led the gainers while IOC (-1.6%), IndusInd Bank (-1.2%), and ONGC (-1.2%) led the losers.
Excerpts of an interview with Ms. Vibha Padalkar, MD & CEO, HDFC Life Insurance with ET Now on 3rd September 2021:
- The potential target company needs to have a credible distribution which Exide Life has. Exide Life has a strong agency channel and another aspect is the quality of the book.
- Exide Life has a scale issue which is a problem for many smaller players. Presently, Exide Life has 37,000 agents and a lot of them are highly productive. This will add about 30% to 40% of agency force to HDFC Life.
- Exide Life has a strong presence in the southern regions of India and also in tier II and III towns, about 40% of business comes from these geographies. This is complementary for HDFC Life which has a focus on Metro cities.
- About 89% of the consideration is in share swap form. About 11% which is worth Rs 7,260mn will be a cash payout. After the share issue happens, Exide Industries will be on-boarded as HDFC Life shareholder with a 4.1% stake in the merged entity.
- The first phase of the merger is after the CCI & IRDAI approval, HDFC Life will be able to issue shares to the seller and the entity becomes a subsidiary of HDFC Life. After that HDFC Life will go approach the NCLT for merger approval of the subsidiary into the parent company. But after the first phase HDFC Life will have a control over the business.
- Due to the cash payout of Rs 7,260 mn, HDFC Life’s current solvency ratio will go down by about 15%. As this will happen after a few months, fresh profit will be generated by the company and the solvency ratio start recovering.
- Exide Life’s embedded value is about Rs 27bn. HDFC Life is reasonably satisfied of the quality of their embedded value does not believe that there would be any material impact to that embedded value after HDFC Life take control of the entity.
Asset Multiplier Comments:
- This deal has could expand HDFC Life’s presence in the southern regions of India. Growth is likely to be driven from the tier II and III towns as Exide Life has a strong presence in these geographies.
- This deal is beneficial for HDFC Life in terms of distribution mix and product mix. This acquisition will improve the new business margins because of product mix and HDFC Life has focused on creating diversified channels and products.
Consensus Estimate: (Source: market screener website)
- The closing price of HDFC LIFE was ₹ 735/- as of 06-Sept-2021. It traded at 100x/80x/67.7x the consensus EPS estimate of ₹ 7.3/ 9.2/ 10.8 for FY22E/FY23E/FY24E respectively.
- The consensus target price of ₹ 777/- implies a PE multiple of 67.7x on FY24E EPS of ₹ 10.8/-
- In the case of life insurance companies, the embedded value per share is the correct multiple for valuing the company. The consensus estimate of this metric is not available on any of the websites.
Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”