HDFC Life Insurance - Exide Life Acquisition - Maintain ADD - YES Securities

CMP: Rs 733; TP: Rs 783, Upside: 7%

Our view - The rationale for Exide Life acquisition seems to make reasonable sense

We participated in the Conference Call hosted by HDFC Life Insurance's (HDFL) top management and gleaned several takeaways. Some of the key takeaways include (1) Rationale for the acquisition seems largely sensible and includes the following key reasons (a) HDFC Life is focused on diversifying sourcing mix, especially agency force and the acquisition of Exide Life will add about 40% to agency-driven topline about 35% to the agent base. (b) There is significant complementarity in geographical presence as Exide Life has significant presence in the Tier 2 and 3 centres, which contribute more than 60% to their business. They also have significant presence in the South. (c) The combined entity stands to gain significantly from post-merger synergies on account of cost benefits from operating leverage, product mix changes, productivity and persistency enhancement. The total consideration of Rs 66.87bn for Exide Life, of which Rs 7.26bn is cash, values Exide Life at 2.46x current EV, given Exide Life June 2021 EV of Rs 27.11bn. We maintain ADD Rating for HDFL with a revised price target of Rs 783. We most prefer IPRU in the life insurance space.

The acquisition of Exide Life will add about 40% to agency-driven topline about 35% to the agent base, a key strategic goal for HDFC Life

The acquisition of Exide Life will add about 40% to agency-driven topline about 35% to the agent base. There is significant focus on agency force at HDFC Life and the company has added the most agents in the industry in 1QFY22. HDFC Life has been growing agency force at about 40% recently and at a 20% CAGR, which will be sustained for HDFC Life from an organic perspective but the Exide Life acquisition will be equivalent to 2-3 years' worth of agency force augmentation.

There is significant complementarity in geographical presence as Exide Life has significant presence in the Tier 2 and 3 centres and the South

Exide Life has significant presence in the Tier 2 and 3 centres, which contribute more than 60% to their business. Exide Life also has significant presence in the South, where HDFC Life's current share of agents is 26%.

The combined entity stands to gain significantly from post-merger synergies

The synergies would be realized 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% higher, which will benefit as scale kicks in. Exide Life's cost to revenue is about 20% compared to 12-13% for HDFC Life and their ratio will normalize closer to that of HDFC Life's. There will be time to get Exide Life's post-overrun new business margin closer to that of HDFC Life's.

We maintain ADD Rating for HDFL with a revised price target of Rs 783

The total consideration of Rs 66.87bn for Exide Life, of which Rs 7.26bn is cash, values Exide Life at 2.46x current EV, given Exide Life June 2021 EV of Rs 27.11bn. We maintain ADD Rating for HDFL with a revised price target of Rs 783, valuing HDFL at 4.3x FY23 P/EV. We most prefer IPRU in the life insurance space.

Shares of HDFC LIFE INSURANCE COMPANY LIMITED was last trading in BSE at Rs. 734.45 as compared to the previous close of Rs. 758.8. The total number of shares traded during the day was 388659 in over 12236 trades.

The stock hit an intraday high of Rs. 747.85 and intraday low of 728.55. The net turnover during the day was Rs. 286582459.

Source : Equity Bulls

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