Broking firm, Emkay Global has listed the stock of bluechip insurance firm, HDFC Life to buy for long term returns, though the brokerage believes the recent acquisition of Exide Life is at a premium.
Buy HDFC Life Insurance for 18% gains
|Current market price||Rs 737|
|Target price Rs||Rs 870|
|Target time frame||12-months|
The brokerage has set a target price of Rs 870 on the stock, as against the current market price of Rs 737, thus implying returns of 18%.
HDFC Life to acquire Exide Life
HDFC Life is set to acquire 100% of Exide Life for a total consideration of Rs 66.87 billion. According to Emkay Global, at 2.5 times Jun'21 EV, the valuation paid for Exide Life far exceeds the quality of franchise.
"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 enterprise value. 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," the brokerage has said.
Valuation premium means little for HDFC Life but might delay consolidation in the sector
According to Emkay Global, the valuation premium of Rs 40 billion over the enterprise value 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. Given that not many of the sector leaders would be keen on paying such a premium valuation for a weaker franchise, this would delay the consolidation process in the sector," the brokerage has said.
"The share of current Top-8 private life insurers (SBI Life, IPRU Life, HDFC Life, Max Life, Bajaj Allianz Life, Tata AIA Life, Kotak Life and Birla Sun Life) in the private sector new business WRP has gone up to 83% in FY21 from 71% in FY14. So, these Top-8 players are not really facing real competition from the smaller players. On the other hand, the smaller players, especially the ones without material bancassurance, have been struggling. All these factors point to the fact that there are many smaller players up for sale and there are not many suitors for the firms without sizeable bancassurance distribution. In this background, the premium valuation paid for Exide Life looks unwarranted," Emkay Global has said.
Highlighting some points from a concall, Emkay global has stated that according to the management the acquisition complements HDFC Life's geographical presence as Exide Life has a strong foothold in South India, especially in tier 3 towns, which will give HDFC Life access to a wider customer base.
HDFC Life shares were last trading at Rs 736 on the NSE.
The article is informational in nature, which is taken from the brokerage report of Motilal Oswal institutional Equities. Please do consult a professional advisor. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and authors do not accept culpability for losses and/or damages arising based on information in the article.