Apollo Munich buy to push HDFC to leading position in general insurance space; TP revised to Rs 2,380; stock valuations are justified
In current scenario of NBFC/liquidity crisis, HDFC has been a clear winner given its superior balance sheet, ample availability of funds and weakening competition. Value unlocking and value creation exercise continues for HDFC—it has sold/proposed to exit GRUH by merging with Bandhan Bank and more recently announced acquisition of 51.2% stake in Apollo Munich Health for Rs 13.5 bn.
The acquisition is positive, but general insurance contributes just 2% to SoTP. Earlier HDFC Ergo had acquired L&T General Insurance and with this acquisition, it will gain the leadership position. The merger is expected to enhance product suite, distribution network, technology and operating leverage. HDFC had also tried inorganic growth in the life insurance space (acquire Max Life), but did not get requisite approvals.
HDFC has entered into an agreement to acquire 51.2% stake of Apollo Munich Health Insurance Company for Rs 13.5 bn (50.8% stake will be acquired from Apollo Hospitals and remaining 0.4% from employees). The deal is valued at 4.2x FY19 networth and 1.3x FY19 gross earned premium. The merged entity would have 6.4% market share of non-life industry and 8.2% share within accident and health segment. The deal is expected to be complete within 4 months, post which it will be merged with HDFC Ergo.
ADD with revised SOTP-based TP of Rs 2,380 (9% upside)
HDFC has been in the continuous process of not only value creation but also value unlocking. Value unlocking through IPO of HDFC Life, HDFC AMC and sell down of GRUH and value creation by maintaining stake in HDFC Bank, buying Apollo Munich Health/L&T General, HDFC Credila Financial Services. With best in class return ratios and quality of book, it will continue to command premium valuations. At CMP, HDFC trades at 2.4x/2.2x FY20E/FY21e ABV of Rs 382/400 (adjusted for cost and value of investments).