Shares of HDFC Life Insurance Company Ltd surged to a one-year peak of more than 8 percent early on April 24 after the Reserve Bank of India allowed raising the stake in HDFC Life and HDFC ERGO to more than 50 percent following the merger of HDFC and HDFC Bank.
The stock gained as much as 8.2 percent - its biggest since April 4, 2022 - to a high of Rs 554.60 on the BSE. At 9.35am, the stock was trading at Rs 545, up 6 percent from previous close.
According to Emkay and Nuvama Research, the decision by the RBI to hold more than 50 percent stake by HDFC twins in insurance entities is a significant boost for HDFC Life. The management has not quantified how much they will increase the stake to. The theoretical limit is 100 percent.
"We believe it should be 50-60 percent. The Street had a high probability of this relaxation coming through. In the analyst day last year, the management had explained that a higher stake would also mean higher cross-sell," Nuvama said.
According to Emkay, this decision will result in two major benefits for HDFC Life. First, HDFC Life will become a direct subsidiary of HDFC Bank, leading to a potential improvement in its current 50 percent share in the HDFC Bank channel, as well as an increase in margins due to an anticipated reduction in the cost of distribution in the HDFC Bank channel.
Second, the concern about a possible 19 percent stake sale by HDFC-HDFC Bank (which currently holds 48.65 percent stake in HDFC Life) if the RBI had directed them to keep their stake below 30 percent, is now eliminated, and it is confirmed that HDFC-HDFC Bank will acquire fresh or secondary over 1.35 percent stake before the merger-completion, an Ekmay report said.
Most industry experts agreed that the RBI's decision would have a positive impact on HDFC Life, but opinions were divided regarding the decision itself. "The timing of the RBI's decision is noteworthy, as the regulatory and taxation environment for the life insurance industry is rapidly changing, which could have adverse effects. Additionally, other listed life insurance companies are facing challenges of their own. However, with the removal of the significant overhang that previously existed, HDFC Life is well-positioned to grow profitably and increase its market share," the report added.
Emkay has upgraded HDFC Life to 'buy' with a target price of Rs 650 a share. "To reflect the impact of the new synergistic HDFC Bank-HDFC Life relationship, we change our FY24-25 estimates and upgrade the stock... The relatively clearer outlook for HDFC Life – at a time when listed peers are facing certain specific challenges of their own – implies that HDFC Life’s premium valuation versus peers would sustain, in our view. HDFC Life is our top pick in the sector," Emkay said.
Brokerage firm Motilal Oswal Securities expects the RBI's decision to remove a key overhang on HDFC Life, which could enable an additional buying of Rs 2,200 crore into HDFC Life. The investments made by HDFC Limited can continue to be counted as investments of HDFC Bank. The brokerage adds that it will ensure complete alignment between the interests of the bank and the life insurance arm, as well as provide a boost to HDFC Life's distribution network and potential margins.
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