Post Merger Prospects Of HDFC Life Insurance & Exide Industries
After the recent deal between HDFC Life and Exide, what are the prospects for each company?
The news of HDFC Life Insurance acquiring Exide Life Insurance has been all over the internet. The merger worth Rs. 6687 crore has sparked a lot of views and for good reason. We believe this merger can be good for both the parties involved. In this newsletter we will try and explain why this merger has the potential to be a good deal.
Indian Life Insurance Industry: The Indian life insurance industry is dominated by government players like LIC with the remaining share fragmented between private sector players. As per reports, only 2.82% of India’s 1.3 billion population in 2019, or about 1 in every 35 Indians, had life insurance protection. The gross under-penetration of the insurance industry serves as a potential goldmine for insurance companies.
Details About The Deal: The acquisition of Exide Life would be done through a cash payout of Rs. 726 crore and the rest through a share consideration by allocating 8.7 crore shares at Rs. 685 per share. Thus, the total consideration for the merger comes to Rs. 6687 crore. Exide Industries will have a 4.1% stake in the merged entity. Exide Life has an embedded value of Rs. 2,711 crore, AUM of Rs. 18,780 crore (10.4% that of HDFC Life) and a total premium of 3,335 crore as on June 2021. The deal has been estimated to be done at a P/EV of 2.5x.
Benefits To HDFC Life: Exide Life insurance has a strong presence in South India especially in the Tier II and III cities. Exide Life is also credited to having a strong agency network which in turn should complement HDFC Life’s business. The proposed merger should add Exide’s almost 12 lakh customers in HDFC Life’s business along with addition of over 36,700 advisors across a 200+ branch network. This integration is expected to add about 40% to HDFC Life’s topline business via the agency channel and around 35% to the agent base. Currently, HDFC Life’s agency channel constitutes about 15% of its total business. Private market share is expected to get a boost of almost 1.3% due to the merger.
It is imperative to understand that a strong sales network is important to sell insurance in India. There is a lack of awareness in the population regarding the need for insurance which in turn has resulted in the severe under-penetration of insurance products in India. The proposed merger will bolster HDFC Life’s sales network which should ideally result in an increase in sale of different insurance products, cross selling of several products and boost future premium collection.
Benefits To Exide: Exide had entered the insurance business in 2005 when it first acquired a 50 per cent stake in ING Vysya Life Insurance from GMR industries. That deal was struck at just over Rs 200 crore. In early 2013, Exide bought the remainder of the initial entity for Rs 550 crore, valuing the company at Rs 1,100 crore. For a business that commands only 1% of the market share, being sold for about 6,700 crore (a multiple of about 6x on the 2013 entity) represents great value unlocking for the shareholders of Exide. The promoters of Exide did not invest a lot of resources or time in the insurance business because it was not a core business and running an insurance business in India is tricky. Exide Life has been struggling on the expense front and its retail business has recorded poor consistency. The company has recorded a mediocre three-year premium and EV CAGR of about 10% and 8%, respectively. The private sector of the insurance business is dominated by the “Top 8” players. The private sector new business Weighted Received Premium (WRP) has gone up to 83% in FY21 from 71% in FY14.
The sale of the insurance business has resulted in great value generation for current shareholders and will allow the company to focus on their core battery business. The battery business in India is largely duopolistic, hence it is important for Exide to constantly be competitive. The battery industry is evolving rapidly with the fast paced electrification of batteries. Exide has still not made concrete commitments towards the electric battery business and this merger should provide them with sufficient bandwidth to adapt as the industry evolves.
Key Risks and Potential Mitigations: HDFC Life’s listed peers on average have a P/EV multiple of 3.5. Given that Exide Life has not had the strongest performance in the past, the multiple seems pricey. However, given the cash consideration is only a shade over 700 crores, and Exide would hold about 4% in HDFC Life, we do not think HDFC Life would be too worried about the financials of the decision.
Mergers have a notorious history of turning sour because of different company cultures among other reasons. HDFC Life management expects to complete the acquisition process in the next 6-9 months and complete the integration in the next 12-15 months. Despite the small size of Exide Life, the integration process, including system integration, management and employee rationalization, branch rationalization and agency integration, could be a daunting task. It is to be seen closely if this process becomes a material distraction for HDFC Life management over the next 3-5 quarters.
Finally, there might be antitrust complications that arise from any M&A activity. However, given the fragmented nature of the insurance industry, we do not believe this should not be an issue.
Final Thoughts: The Indian insurance industry is its nascency with impending and much needed consolidation. The lofty premium paid for this merger might delay the consolidation process, but it remains interesting to see how this merger plays out and the effects it will have on the Indian insurance industry at large. The effects might be amplified given that LIC’s IPO is around the corner.