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HDFC Life Insurance Company Ltd is all set to beef up its distribution network and gain a stronghold in the southern states of the country through its acquisition of Exide Life Insurance. However, the question is whether the most valuable private life insurer made a costly bet.

One sign that investors are showing concern on the deal value was the 3.3% fall in HDFC Life’s share price on Friday after the acquisition was announced. The private-sector life insurer would pay 6,687 crore in a cash-and-stock mix to buy Exide Life. Exide Industries would get 716 crore upfront cash and 8.7 crore shares of HDFC Life at 685 apiece. Exide will hold 4.1% stake in HDFC Life.

It is clear that Exide shareholders stand to gain far more than those of HDFC Life. After all, HDFC Life has demonstrated a strong performance trajectory so far, justifying its premium valuation. Shares of battery maker Exide Industries, the parent of Exide Life, surged 5.8%.

A leap of growth
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A leap of growth

The rationale behind the purchase is to boost HDFC Life’s agency distribution channel, the insurer’s managing director and chief executive officer, Vibha Padalkar, said in an investor call on Friday.

Another reason is the desire to penetrate into south India and into tier-2 and tier-3 cities, and Exide Life has a stronghold here. As much as 50% of Exide Life’s business comes from the southern states of India, said Niraj Shah, chief financial officer of HDFC Life. “Their geographical presence is complementary to us," he said.

Exide Life’s acquisition will add 40% to HDFC Life’s agency channel and 38% of channel business on an annual premium equivalent (APE) basis, which is significant, Shah pointed out.

However, one question that investors must ask is whether HDFC Life could have grown organically instead of shelling out 6,687 crore just to boost agency network.

HDFC Life’s business growth has been a stellar 17% over the past three years, on a compound annual growth rate basis. This is significantly higher than the 3% clocked by the life insurance industry.

The growth has been despite the effect of lockdowns following the coronavirus outbreak. HDFC Life added the highest number of agents in the industry during the June quarter. The insurer’s agency force has recently been growing around 40%, analysts at Yes Securities Ltd pointed out. Exide Life’s acquisition would boost the agency network equal to two-three years of growth at one go, they said.

For HDFC Life to maintain its double-digit business growth, the inorganic route looks easier.

That said, Exide Life hasn’t really made a mark when it comes to growth. Its market share has been steady around 1%. Further, post cost overruns, the margins are lower than that of HDFC Life, indicating high costs and lower productivity. Exide Life’s underwriting standards, product mix and even cost overruns are manageable and would soon match that of HDFC Life, Shah said.

In the near-term though, it is clear that HDFC Life’s metrics may be pulled down slightly.

The deal values Exide Life at 55% discount to HDFC Life’s valuations, a Jefferies report pointed out. Whether the valuations justify the benefits that HDFC Life will accrue remains to be seen. It would take 12-18 months for HDFC Life and Exide Life to merge and the benefits of the acquisition would accrue in one-two years after that.

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