Immediate gains more likely for Exide Industries' stock than HDFC Life

Former gets exit from a non-core capital-intensive business as well as liquidity; merger synergies for latter likely between 12-15 months

The buyout of Exide Life by HDFC Life had an interesting market impact. The share price of HDFC Life dropped 3.25 per cent after rising over 10 per cent in the past 10 sessions. The share price of Exide Industries rose 6.4 per cent.

Going by that, the market thinks the deal will benefit Exide Industries for sure, and is less sure about HDFC Life. Apart from profit-booking, HDFC Life shareholders were disappointed since they were expecting a fund-raising plan, which may not be on the cards.

HDFC Life pays Rs 6,687 crore in a cash-cum-share deal, with cash of Rs 726 crore and the issue of 87.02 million shares valued at Rs 685 per share (a discount to CMP of Rs 734). The subsidiary (Exide Life) will be merged. The promoter HDFC Limited is holding 49.9 per cent stake. Post-merger, HDFC Ltd will hold 47.9 per cent and Exide Industries will hold 4.1 per cent stake. Other investors in HDFC Life will see their combined stake drop to 48 per cent (current 50.1 per cent). Assuming approvals from shareholders, IRDAI, NCLT, and CCI, etc., the merger would complete by end-June 2022. Hoped-for synergies are estimated to take a timeline of between 12-15 months.

HDFC Life is looking at a jump of 40 per cent in agency revenues (agency revenues contributed 15 per cent of topline in FY 2021-22) and expansion of its footprint in South India where Exide Life has a strong presence, especially in Tier-2/3 locations.

In FY21, (this was not a normal fiscal) HDFC Life had total premium of Rs 38,583 crore, and Exide Life had total premium of Rs 3,325 crore. The HDFC Life agency new business was Rs 937 crore, while Exide Life had Rs 358 crore of new agency business. Exide Life’s network of 36,710 agents will be added to HDFC Life’s base of 107,895 agents. Assets under management rise to Rs 2 trillion plus, including Rs 1.81 trillion (HDFC life) and Rs 18,780 crore (Exide Life). HDFC Life’s solvency ratio was at 203 per cent in the last two reported quarters, well above the mandated 150 per cent while Exide Life had a solvency ratio of 220 per cent at end-FY2020-21.

HDFC life has a market share of over 8 per cent in life insurance while Exide Life has a market share of 0.34 per cent, according to IRDAI data. Exide Life is an unlisted 100 per cent subsidiary of Exide Industries. Hence, details like ROEV (Return on Embedded Value) are not available. (ROEV is the PAT as a ratio of existing contracts marked to present value). Exide Life’s embedded value (EV) is about Rs 2,711 crore, according to market estimates.

For Exide, one of the world’s largest battery-makers, this is part of a monetisation exercise where it divests non-core business. Exide Industries acquired 100 per cent of ING Vysya Life Insurance in 2013 and the name was changed to Exide Life.

In Q1, 2021-22, Life insurance business contributed Rs 977 crore to the topline, while batteries contributed Rs 2,561 crore. In FY 2020-21, insurance contributed Rs 4,937 crore, while batteries contributed Rs 10,342 crore. Life insurance segment had a pre-tax loss of Rs 90.9 crore in Q1, 2021-22 and a PBT of Rs 76 crore in FY 2020-21. A 4 per cent stake in the much-larger HDFC Life makes more sense than trying to grow a non-core business.