Is the market giving any value to its 100% life insurance subsidiary?
FY16
Total Premium collected around 2000 cr
Profits at 88cr vs. 65 cr year ago. Last 4 years 56% PAT CAGR.
AUM 9530 cr
In my opinion, the market is not only not giving much valuation to the insurance business, it probably is treating it as an example of poor capital allocation and diworsification - which in a way it was!!
Also, I don’t see how they can continue with the insurance business as their entire management team is taken from the battery business, including their new CEO.
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Agree on the diworsification aspect. This very investment can potentially be a crown jewel given the industry prospects and given that markets are warming up to icici ins ipo and the recent hdfc max merger.
If the mgmt is spread too thin between the two biz, i wud imagine a stake sale to happen sooner rather than later.
Embedded value as of fy16 is 1870 cr.
Icici and hdfc life ins have been valued between 2.5 to 2.8 times forward embedded value.
A conservative 2x that too on current ev is significant.
Lets see how this plays out.
What is the per share value of insurance budiness based on 2X Ev?
Lot of hype and hoopla around insurance. Exide will do better if they sell this stake now.
I have not done a detailed analysis yet, but as per a recent report from IDBI Capital, the insurance business is worth Rs20/share at 2xBV.
Exide’s LI business had embedded value of close to 1900 Crore in March 2016.
http://www.exidelife.in/docs/default-source/statement-of-embedded-value/financial-year-2015-16-h2
If we look at peer benchmark valuation- they command valuation of 2.5-3 times of embedded value. So, going by that, the intrinsic value of this can be close to 4500-5000 Crore. Also, if you look at the Exide LI business, it has been improving significantly on all parameters.
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As an example, 2x on EV is 3800 cr. Mcap at 15000 cr. That’s a neat 25%
But then we need to account for holding company discount as someone who wants to play on Exide’s life insurance has to take exposure to Exide’s battery business. Holding company discounts can range anywhere from 20 - 80%.
So this is not a pure play theme. To realize the full potential of the underlying life insurance business, the subsidiary needs to be listed. Hence at this stage, no reason for the stock to get excited.
Disc: Invested
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Exide covered in businessline today. A few points stated in the report:
a. Derives 60% revenues from automotive batteries.
b. Affected by capacity constraints in 2011 where it had to forgo sales in replacement market to cater to OEMs
c. Fresh capacity came up later when the economy had slowed down. Had to grapple with high costs and low utilization.
d. Mgmt indicated recouping market share in replacement market.
e. Volumes have grown 15-20% in each of the last couple of quarters.
f. Lower borrowing costs, good monsoon and 7th pay comm expected to benefit automotive demand.
g. Compliance requirements under the GST should bring down the price advantage with unorganized players.
h. To meet the expected increase in demand over the next few years, the company’s undertaking capex to the tune of 1400 cr funded by internal accruals.
i. Exide margins are lower than its own peak levels of 18-20%. Margins have bounced off from the lows of 18-20% in 2011. Focus on profitability more than market share.
j. Benign lead prices.
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I read this thread and also initiated a small position in Exide industries, primarily due to the recent improvement shown by the company’s core business. Also, its Life Insurance Business is doing reasonably well.
One thing with which I am not comfortable is the fact that - in none of the management interactions does the mention of Life Insurance comes up. It seems as if they deliberately don’t mention anything about it. Even on company website and its annual report there is hardly any mention of the same.
How am I supposed to read into this? What is the intent of the management?
Can somebody elaborate?.. …It ll be of great help.
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Also the quarterly consolidated results are not published by the company. Consolidation of P&L is done only annually
Is this allowed??? Can somebody elaborate???
Thanks
Ranvir Dehal.
Consolidated nos are mandated annually. A lot of companies do not publish consolidated nos on a quarterly basis.
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Thanks Abhiseikh for the reply.
Regards,
Ranvir
ICICI Pru Life IPO valuations augurs well for Exide’s Life Insurance biz.
ICICI Pru life Insurance to raise about 5800 to6000cr via IPO
Valuation likely between Rs 46000-48000cr
IPO likely to value the Life Insurance biz at 3.3x – 3.4x P/EV
Alert: Embedded value at 13939cr for FY16
While trying to find out demand for Lead-Acid Battery and its market forecast, I ran into the following research report [link]
The excerpts from the report.
Since 2015, affected by the effect of lithium battery substitution, the demand for the lead-acid battery for electric bicycle has dropped quickly; sluggish demand from upstream sectors resulted in significantly slower growth in demand for the lead-acid battery for automotive starting and electric tricycle. In addition, as the year 2015 is the deadline for cleaning up excess capacity and the capacity causing severe pollution, a large number of small lead-acid battery producers can’t get access permits, and have to stop production for rectification or produce secretively, leading to further slower apparent growth rate.
Johnson Controls is the world’s largest lead-acid battery producer with a 15.7% market share in 2015. In spite of this, the company is suffering a sustained decline in market share from as high as 26% in 2010. As companies continue to expand capacity, the advantage of market leader is waning. Meanwhile, as China pursues the elimination of outdated capacity, the market space for small companies keeps narrowing. Attracted by emerging markets (lithium battery and PV), some companies (like Panasonic) reduces investment in lead-acid battery.
For now, the lead-acid battery for communications back-up power, energy storage, and electric bicycle will be hardest hit by lithium battery in the short term. It is expected the application of lead-acid battery in communications back-up power will shrink slightly and the demand for the lead-acid battery for electric bicycle will see a negative annual growth of above 15% over the next few years.
Since Exide is primarily a Lead-Acid battery manufacturer, I am wondering what this means for Exide.
In my opinion, it should not have any effect in the medium term (2 to 3 years).
Perhaps in the future pollution laws limiting the use of Lead-Acid batteries could be enforced but I do not see it happening any time soon.
However I would like to know the views of other members. Is it a cause of worry and if so what would be the impact in the long term?
Disc: No holdings yet, looking for an entry.
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The IPO won’t change fortunes of Exide Life much, FY 16 declared EV is INR 1870 crore on a capital of INR 1750 crore.
ICICI Prudential can command premium valuations being the market leader, access to low-cost bancassurance agency and lower expense ratios. Exide Life doesn’t enjoy the same low costs for new business and lost it after the tie-up with ING Vysya Bank came to an end and now relies on a network of co-operative banks.
I’m invested.
I also tried to search for the fact as to why are lead acid batteries so popular when Li-ion ones are lighter and non polluting. Came across this interesting article-
Modern electric cars were made possible by lithium-ion batteries. But look under the hood of any electric vehicle and you’ll find a second battery, a lead-acid battery, whose purpose is to power the 12-volt system. A reader asked us why isn’t this a lithium-ion battery as well?
Lead-acid batteries have an obvious problem: their weight. Specifically, the energy density, or kilowatt-hours of energy storage per kilogram of weight. Using a lithium-ion battery instead of a lead acid battery for the 12 volt system would reduce the car’s weight, improving its overall efficiency.
Another problem with lead acid batteries is toxicity. Some of us buy electric cars because they’re kinder on the environment, and lead acid batteries are not exactly clean nor kind to the environment. Lead itself is toxic, especially to young children, and there are several toxic chemicals used in lead battery manufacturing.
The 12-volt battery stores the power for the 12-volt system that runs components like the lights, entertainment system and the heating/cooling system. This battery is kept charged by a DC-DC converter which produces a 12-volt source from the main battery pack. There’s nothing magic about the 12-volt system which makes lead-acid batteries technically better. Since automakers obviously know how to design and build a high-voltage lithium ion pack for the traction battery, they could obviously do so for the accessory battery as well.
Clearly it would be nice on at least two fronts to use something other than lead-acid batteries for the 12-volt system. A quick glance at the price of lithium ion versus lead-acid batteries though tells us why automakers use 12-volt lead-acid batteries: cost.
Unfortunately, we don’t know the cost automakers pay for batteries. We can estimate the cost difference between lithium ion and lead-acid 12-volt batteries with the ALM-12V7, manufactured by A123 Systems. This is a a plug-and-play replacement for for the industry standard 12-volt, 7 amp-hour sealed lead-acid batteries that are used in a wide range of equipment. The cost for the ALM-12V7 is $129 and its weight is only 1.875 lbs, while the cost for 12-volt 7 amp-hour lead-acid batteries is in the $10-20 range, weighing about 4.5 lbs.
Lithium Pros is another maker of 12-volt lithium batteries, which are direct replacements for typical car batteries and provide the kind of power output required to turn a starter motor. The prices we found for their batteries carry an even higher premium. The Lithium Pros 12-volt, 20 amp-hour battery weighs only 9 lbs, but costs over $1000, which is much lighter than the equivalent lead battery, but at a very high cost.
Another gain is the engineering resources that would have to be spent to design a suitable 12-volt lithium ion battery. All the automakers have access to a ready supply of 12-volt lead-acid batteries from a long list of manufacturers. It’s a classic buy-versus-build decision, where it’s cheaper to buy a component than to design and manufacture it yourself.
So, by the time technology catches up to substantially reduce the cost of Li-Ion batteries, I guess, we are in safe hands.
Also if Li-Ion were to replace Lead-Acid some day, chances are that Exide would be the Leader.
Disc: Invested and planning to increase my exposure.
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Thank you @ranvir for clearing up. Your post helped me to clear some things and increased my conviction on Exide!
Found this article on Exide…
http://www.newschannel10.com/story/33184813/exide-unveils-new-battery-innovations-at-automechanika
Disc- Invested
My bad! I was doing some research on Exide’s foray into next generation batteries (Ex- Li-Ion) and didnt realize that another battery company could have the same name as Exide. Will be more cautious next time!