Investec Securities says that investment in the non-related life insurance business was one of the major sticking points with investors in relation to Exide Industries.
“This issue seems to be now resolved and should lead to significant re-rating for the stock,” it said, adding that the proceeds would help Exide fund lithium-ion cell manufacturing.
The brokerage has set a target of Rs 220 on the stock, which at Thursday’s closing price suggests 25 per cent potential upside. On Friday, the stock was trading at Rs 191.70, up 7.55 per cent. It had gained as much as 14 per cent in the morning trade.
Exide Life Insurance will be sold to HDFC Life for Rs 6,687 crore. Exide made Rs 1,679.59 crore investment in the insurance company.
The proposed acquisition value of Exide Life implies a valuation of 2.1 times FY23 EV compared with Investec’s own valuation estimate of 1 times FY23 EV.
“On a per share basis, Exide Life’s valuation works out to be Rs 79 compared with Rs 38 built in our estimate. Exide Life’s EV as on FY21 was Rs 2,700 crore, implying valuation of 2.5 times EV on trailing basis. Post the shareholder, IRDAI and CCI approvals, the transaction is likely to be completed by June 2022,” it said.
Exide will receive a cash consideration of Rs 726 crore and will be issued HDFC Life shares at Rs 685 per share for the rest of the amount. As a result, Exide Industries would end up holding 4.1 per cent stake in HDFC Life.
Krishna Kumar Karwa of Emkay Global Financial Services said it is the bigger players nowadays who keep on gaining the market share and the smaller guys are just unable to grow and have to possibly go for an M&A etc.
“So something similar has possibly happened here. It is a very good consolidation that is happening and you will see something like this happening in many more sectors,” Kumar told ET NOW.
Exide Industries recently highlighted its intention to foray into lithium-ion cell manufacturing over and above its existing battery pack manufacturing plant at Gujarat in partnership with Leclanche, a Switzerland-based company.
“Our industry checks suggest that 1GWh lithium-ion cell manufacturing plant requires investment of close to $100 million and a minimum capacity of 5GWh would be required for the plant to be feasible (cost-competitive) and to be eligible for proposed ACC (Advanced Chemistry Cell) PLI scheme. The proceeds from the transaction should help fund the capital requirement,” Investec said.
Given the strong relationship of Exide with auto and industrial OEMs, Investec believes it should be able to sign customers.
“Moreover, even OEMs with existing tie-ups/JVs like Maruti, Tata Motors, etc. would like to diversify their supply chain and also lower the risk of losing out on technology upgrades,” it said.
Investec said MNCs would also be willing to do a technology tie-up with Exide for lithium ion cell manufacturing.
How will HDFC Life benefit?
YES Securities said the acquisition of Exide Life will add about 40 per cent to the agency-driven topline of about 35 per cent to the agent base, a key strategic goal for HDFC Life. It said there is significant complementarity in geographical presence as Exide Life has a significant presence in Tier 2 and 3 centres and the south. The combined entity stands to gain significantly from post-merger synergies, it said.
“The synergies would be realised over a period of 18-24 months. New business margins will improve as operating leverage and product mix changes kick in. There is also slight scope to improve Exide Life’s agent productivity and persistency. Regarding cost, Exide Life variable cost is largely in line and their fixed cost is suboptimal due to lack of scale. HDFC Life will start selling their products via Exide Life distribution. While Exide Life’s pre-overrun new business margin is in line with that of HDFC Life, their cost ratio is about 60 per cent higher, which will benefit as scale kicks in,” it said.
The brokerage has an ‘ADD’ rating for HDFC Life with a revised price target of Rs 783, valuing it at 4.3 times FY23 P/EV.