Analyst corner | Maintain ‘buy’ on HDFC with price target of Rs 2,310

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Published: June 21, 2019 1:32:37 AM

HDFC’s buying out Apollo's stake in Apollo Munich (fourth largest private health insurer) is expected to scale up its general insurance business, making it second largest private health insurer (post merger with HDFC ERGO).

While deal valuation looks more favourable to Apollo group, HDFC ERGO gets to size up its presence in retail health insurance business.

HDFC’s buying out Apollo’s stake in Apollo Munich (fourth largest private health insurer) is expected to scale up its general insurance business, making it second largest private health insurer (post merger with HDFC ERGO). But at 6x trailing BV for a sub 5% RoE business, we find the price too high. However, overall impact on HDFC should be miniscule. Valuing Apollo Munich at 3x FY19 BV would have a negative impact of Rs 4.6/share (0.20% of CMP).

HDFC (HDFC IN, Buy, PT Rs 2,310) announced purchase of a 51.2% stake in Apollo Munich Health Insurance, paying Rs 13.5bn for the stake (in cash). The deal values Apollo Munich at Rs 26.3bn, implying a valuation multiple of 6.1x FY19 book value (net of accumulated losses). The standalone health insurer is a JV between Apollo Hospital Group and Munich Health Holdings (its subsidiary ERGO is also the JV partner in HDFC ERGO, general insurance subsidiary of HDFC).

For FY19, Apollo Munich reported a gross premium of Rs 21.9bn (28% yoy growth, 26% 5-year CAGR), commanding 4.4% market share in overall health insurance space, 9% market share within private players. Apollo Munich is running at a stretched 164% solvency (regulatory minimum of 150%). Thus, at 6.1x trailing book value, the deal looks expensive.

While deal valuation looks more favourable to Apollo group, HDFC ERGO gets to size up its presence in retail health insurance business. Together, they both would command 7.2% market share in health insurance, making them second largest private player in the space after Star Health (12% share), higher than ICICI Lombard (ICICIGI IN, Buy, PT Rs 1,136) (5% share) and Bajaj Allianz (5% share). Synergies may materialise if the combined scale brings down the overall costs. An agency strength of 68k of Apollo Munich (versus 14k of HDFC ERGO) looks attractive, but we expect a large part of it may not continue due the regulatory limits.

Being one amongst limited number of standalone health insurer favoured Apollo Munich, a benefit which will no longer be there. Overall, even though possibilities of synergy exists, we don’t see them getting reflected in the very near term.

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