Exide Industries' decision to buy out the partner stake in its insurance joint venture ING Vysya Life Insurance will strain its core operations, said a report by Edelweiss Securities. The company had yesterday said that it would increase its stake in the life insurance company to 100% by paying Rs 550 crore for the remaining 50% stake from the other partners including ING.
In a note to its clients, Edelweiss Securities said that they have valued the life insurance company at 1.6X embedded value, whereas its peers are in the valuation range of 1.5-2X. It It added that since the transaction has been in-principle agreed upon at 1X embedded value, it is an attractive transaction for Exide.
However, it added that in the near term, the business would require significant financial and strategic support, which may impact Exide till a new partner is roped in. "The exit of ING/partners will lay the onus of supporting and running the business till such time a strategic partner is roped in. This can drag down the company's performance in the near term," Edelweiss Securities said in the note.
The brokerage said that while the exit of ING from the JV was long due and is positive post induction of a strategic partner, it added that the operations of the life insurance firm will require strategic and financial support till then. This commitment from Exide, according to the note, would strain its resources and managerial bandwidth. The brokerage has said that they maintain 'HOLD' for Exide with a target price of Rs 132.
Meanwhile, a report by Citi has downgraded Exide to sell, on account of its ING Vysya acquisition which is unrelated to core business. Citi said that the de-rating is due to the fact that this acquisition is completely unrelated, loss-making and could possibly require incremental funding, and is unlikely to find a purchaser. It added that they view it negatively and expect the stock to de-rate on the back of this event.
At 12.45 pm, the shares of Exide Industries traded at Rs 123.40 on the Bombay Stock Exchange, down 1.2% from previous day's close.
