Exide Life is a tuck-in acquisition at fair valuations: HDFC Life CEO

In a Q&A, the MD & CEO of HDFC Life dwelt on the contours of her company's acquisition of Exide Life Insurance and how it will help HDFC Life consolidate its position in the industry

On Friday, HDFC Life announced it will acquire a 100 per cent stake in Exide Industries promoted Exide Life Insurance for Rs 6,687 crore, which it said will help it to grow its proprietary business further. Vibha Padalkar, MD & CEO, HDFC Life spoke to Subrata Panda on the contours of the deal and how it will help HDFC Life consolidate its position in the industry and the synergies they will draw from this acquisition. Edited Excerpts:

Besides proprietary business, what propelled the acquisition of Exide Life?  

One is that the back book (old premium-paying policies on the books) is of reasonably good quality, which will give a fillip to our embedded value by 10 per cent. Also, some of the geographies where they are strong, we have been aspiring to enter. These are typically the Tier-2 & 3 cities. So, now we will have access to these geographies and it will give us the opportunity to up-sale and cross-sale, given our brand, our digital presence, and also the bouquet of new products which we have. They also have some marquee relationships with brokers as well as corporate agents such as Bajaj Capital, SVC Bank, and so on. All put together, it’s a tuck-in acquisition.

Is the valuation justified?

I think so. The average current valuation (price-to-embedded value), excluding HDFC Life, is 3.5x and what we have paid is 2.47x, which is a 30 per cent discount. Ultimately, it’s a negotiated number but we believe that given the subscale and the fact that they are vacating space, we feel that it is fair to have a 30 per cent discount. Also, some of the deals that have happened in terms of stake scale, are not very different from the valuation perspective. So, we feel that it is very much in the zone.

Is this the start of consolidation in the life insurance space where smaller companies will get acquired by the big players?

It is possible. But, the smaller companies have to have some credible level of business that they should be able to demonstrate that they have a good hold on the business. It can be bancassurance or agency business. Also, there has to be reasonable business quality and stability in the organisation.

How will this acquisition help HDFC Life’s margins?

It will be on a slightly longer horizon because the first stage of the merger is expected in 4-5 months, when Exide Life will become an entity (subsidiary) of HDFC Life. And, then the NCLT process will happen. So, after 12-15 months from the merger is when we will see some full-fledged impact on our margins.

Will you still be on the lookout for inorganic opportunities for growth. If so, why?

We believe we will continue to grow well organically and we have been growing faster than the industry and at the same time when opportunities come that add capability either in the geographies, customer segment, or distribution, we will look at it because we have the currency, the balance sheet size, the management bandwidth to do these acquisitions. So, it is really a combination of both as a strategy.

Is there a market share that you are looking to achieve in the private life insurance space?

We do not target market share because it often leads to undesirable outcomes. What we focus on is growing faster than the market and growing profitably with quality of business protected. And, market share will be an outcome of that.

The HDFC Life-Max Life deal fell through due to regulatory hurdles. Do you see any concerns about this deal structure passing the regulatory muster?

This is a reasonably straightforward structure. There is no two-tier company or a non-insurance entity. All that made the previous deal complex. While in the life insurance space this is the first one, in the general insurance space there have been a few deals. Based on those experiences, it should be fairly straightforward from the regulatory standpoint.

Given the second wave of covid has subsided, how is the business doing?

We have been growing robustly at around 20 per cent. Covid claims are in line with the extra mortality reserve of Rs 700 crore that we provided. Of that Rs 700 crore, Rs 450 crore was towards retail and Rs 250 crore was towards group. The retail portion is under control as there is a bit of conservatism there. The group part we will know towards the end of quarter but right now it is looking under control.