Emkay Global Financial has given Buy recommendation for HDFC Life Insurance with a target price of Rs. 870 in its research report issued on Sep 03, 2021

Emkay Global Financial’s report on HDFC Life Insurance

HDFC Life to acquire 100% of Exide Life: HDFC Life today announced the acquisition of 100% shareholding in Exide Life from Exide Industries for a total consideration of Rs66.87bn. HDFC Life will issue ~87mn new shares at ~Rs685/share to Exide Industries and will pay Rs7.26bn in cash. After the deal completion, HDFC Ltd. will hold a 47.9% stake in the resultant entity and Exide Industries will hold 4.1%. In terms of most key metrics, the size of Exide Life is ~10% of HDFC Life (Exhibit 1).  At ~2.5x Jun’21 EV, the valuation paid for Exide Life far exceeds the quality of franchise: The Indian life insurance market has been difficult for smaller players, and the players below the Top-8 have been struggling for many years. In particular, the smaller players without any meaningful bancassurance distribution have been battling to grow and manage their high fixed costs. Exide Life has been no different. It has been struggling on the expense front and its retail business has recorded poor persistency. In this context, the ~2.5x P/EV (Jun’21) paid to Exide Life appears to be at a significant premium over its intrinsic value. The three listed peers of HDFC Life currently trade at ~3.5x Jun’21 EV. It is worth noting here that these listed peers have a very strong brand, massive economies of scale, formidable bancassurance distribution and sustained high operating return EV.

Outlook

The valuation premium of ~Rs40bn over the EV of Exide Life means ~3% of HDFC Life’s current market cap. However, the valuation of ~2.5x P/EV for a franchise without any material banca distribution sets an expectation benchmark for other such struggling companies.

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