Acquiring insurance partners' stake will strain Exide's core ops

Exide Industries Ltd’s decision to buy out the partner stake in its insurance joint venture ING Vysya Life Insurance Co will strain its core operations, said a report by brokerage firm Edelweiss Securities.

Exide, India’s largest producer of automotive and industrial batteries, had yesterday said it would acquire the 50 per cent stake of its partners, including Dutch financial services group ING, in the JV for Rs 550 crore.

In a note to its clients, Edelweiss said it had valued the life insurance company at 1.6X embedded value, whereas its peers were in the valuation range of 1.5-2x. It added since the transaction had been in-principle agreed upon at 1X embedded value, it was 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, the operations of the life insurer 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 maintained ‘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 the de-rating was due to the fact that this acquisition was completely unrelated, loss-making and could possibly require incremental funding, and was unlikely to find a purchaser. It viewed it negatively and expect the stock to de-rate on the back of this event.

Exide’s stock closed 0.92 per cent down at Rs 123.75 on BSE on Thursday, while the benchmark Sensex shed 0.51 per cent at 19,923.78 points.