The stock of HDFC Life fell by more than 3 per cent intra-day on Friday after the announcement of the deal with Exide Life. The deal value seems to be one reason for this fall.

The deal, which values Exide Life at 2.47 times its June 2021 embedded value of ₹2,711 crore seems expensive given its traditional (or savings)- heavy product portfolio. This portfolio, which constitutes near 90 per cent of mix, is low yielding when compared to term protection products. Besides Exide’s 13 month persistency ratio is at 75.9 per cent (June 2021), compares poorly with 90 per cent in the case of HDFC Life and an industry average of above 80 per cent. Listed players with much better metrics and product mix trade at a multiple of 3.4-3.7 times their embedded value (June 2021), while HDFC Life trades at a premium valuation of 5.4 times. The deal’s current structure of acquiring Exide as a subsidiary in the interim (instead of a straightforward merger) has also raised few brows.

Besides, investors also seem to have reacted to resultant effect of the deal on the company’s solvency ratio and the likely need to infuse more capital.

Exide Life Insurance is focussed on providing long-term protection and savings plans and has a strong traditional product portfolio with a consistent bonus track record. The Company manages assets of ₹18,780 crore (June 2021). Exide’s market share in terms of individual weighted received premium is at 1.3 per cent among the private players, compared to 15.5 per cent of HDFC Life.

The management of HDFC Life believes the deal will accelerate the growth of their agency business as well as strengthen other distribution channels. Currently, agencies contribute 15 per cent of HDFC Life’s new business premium (June 2021)

With its predominantly traditional and protection focussed business, the acquisition will boost the existing embedded value of HDFC Life by approx. 10 per cent.

HDFC Life had a solvency ratio of 203 per cent in June 2021.

With the deal requiring a cash payment of ₹726 crore, the management indicated that it could drag its solvency by 16 per cent, taking the standalone solvency ratio of HDFC Life to an estimated 180 per cent.

The management has reiterated that its sufficiently capitalised and is not looking to raise any further in the near term. Besides, the share swap part of the consideration will result in a dilution of HDFC’s stake by 2 per cent in HDFC Life (post issue), from the current 49.9 per cent, to 47.9 per cent, leaving headroom for promoter funding (max at 50%).

The deal appears positive for Exide Industries. Insurance was a non-core business for this battery maker and a distraction when the sector is going through disruptive changes with the EV transition. There is possibility of good upside for its shareholders if management chooses to unlock this value by spinning off shares of HDFC Life it will get as part of the deal, to Exide Industries shareholders. As per Bloomberg estimates, Exide is trading at 19 times FY21 EPS and 16 times FY23 PE (most of the profits estimated are from its core business only). Thus, it appears the market was hardly assigning any value to its insurance business. With the deal netting ₹6,697 crore, or around ₹80 per share, the stock seems to have value now.