Ladies and gentlemen, good day and welcome to the HDFC Life Insurance Company Limited conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star and zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Ms. Vibha Padalkar, MD and CEO, HDFC Life. Thank you, and over to you.
Thank you for joining us for the call today to discuss our acquisition of Exide Life and its subsequent merger with us. Our press release and deal rationale presentation is available on our website as well as that of the stock exchanges. I have with me Suresh Badami, Executive Director, Niraj Shah, CFO, Srinivasan Parthasarathy, Chief Actuary, Eshwari Murugan, our Appointed Actuary, and Kunal Jain from Investor Relations. I will run through the contours of the transaction and would be happy to take questions post that. While we continue to grow faster than the overall life insurance market, we have always been actively seeking opportunities to supplement that with inorganic growth. Our key considerations whilst evaluating potential targets have consistently included a high-quality back book, addition to our distribution capability, ease of execution, amongst other factors.
In line with this thought process, we are pleased to announce the acquisition of a 100% stake in Exide Life Insurance from Exide Industries. The acquisition is being done via issuance of 87 million shares at an issue price of INR 685 per share, and a cash payout of INR 726 crores, aggregating to INR 6,687 crores. Upon completion of the transaction, Exide Industries will hold a 4.1% stake in HDFC Life. This transaction is expected to be a two-step process with the merger of Exide Life into HDFC Life being initiated on completion of its acquisition. The entire transaction, including both the acquisition and subsequent merger, is subject to obtaining the relevant regulatory and other approvals.
The proposed transaction will strengthen our distribution network and give customers access to a wider bouquet of products, as well as sales and service touchpoints. Employees and agents will also benefit from a larger, stronger organization that realizes the synergies arising out of complementary business models built on similar ethos. This amalgamation will unlock significant value for all stakeholders. Over the recent years, we have consistently articulated our focused approach in building a high-quality agency channel. As a recap, our agency channel grew by 49% in quarter one, contributing 15% to overall new business and had a 13-month persistency of more than 90%. We added the most number of agents amongst private life insurers in quarter one. On successful completion of this transaction, Exide Life will add 40% to the top line of HDFC Life's agency business and 35% to our agent base.
We will also benefit from some deep relationships in their other distribution channels, including broker, direct, and cooperative banks. Exide Life complements HDFC Life's geographical presence and has a strong foothold in South India, especially in tier 2 and 3 towns, thus providing access to a wider market. Further, a good quality, predominantly traditional and protection-focused business will augment the existing embedded value of HDFC Life by approximately 10%. The embedded value of Exide Life as on 30th of June 2021 is INR 2,711 crores, implying the combined EV to be more than INR 30,000 crores. HDFC Life's scale, market-leading digital and product innovation capabilities, and prudent risk management strategy will aid in optimizing costs and achieving higher margins for the acquired business. We expect to realize these synergies over a period of 18-24 months.
The private market share is expected to get a boost of over 1%, and assets under management of HDFC Life is expected to increase by approximately 10%, taking it beyond INR 2 trillion. This transaction will enhance value for all stakeholders by improving new business margins via operating leverage and product mix optimization. We look forward to the completion of the proposed transaction in the coming months. Details with respect to the proposed transaction have been uploaded on our website. We are happy to take questions now.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Dhaval Gada from DSP. Please go ahead.
Hi. Thanks for the opportunity. I had one question with two parts to it. The first part is related to the business. If you look at Exide, it has a track record of almost flattish premium growth for the last three and five years, whichever CAGR you want to see. If you look at VIF growth, it's been about 5%-6% CAGR. EV growth about 6%-7%, market share declining. What really has excited in this business for you to choose Exide? That's part one. The second part is on the valuation. If I just take a step back and your earlier attempt to acquire inorganic, which was Max Life Insurance. At that point of time, you were willing to pay about approximately 6x VIF.
In this case, you're almost saying like 4 times VIF on the book for a business which is seeing market share decline and overall, there are no strong points, at least from a financial standpoint to look for. What's the rationale on the valuation side? Yeah, those are the two.
Yeah, thanks for that. We have to look beyond the obvious, because the obvious is anyway what everyone is going after. Agency channel is, like my opening comments that I mentioned, key is building your own. What Exide Life has done very well is build their agency channel. Like I mentioned, it is a very meaningful increase, anything between 38%-40% based on their number of agents and the volume of business. Also if you were to look at geography, it complements our geography. That's where, Dhaval, the nuanced approach to growth starts becoming even more essential than, like I mentioned, the obvious aspect to growth. That's where when we looked a little bit deeper, they were present in geographies, especially in the south, in several places having market leadership, and beyond the metros, tier 1 and tier 2 towns.
To your point on their market share has largely been steady at about 1.3%. No concerns on that front. Like with a lot of smaller companies, scale starts becoming an issue beyond a point. That's exactly also the reason for us to get into this transaction. If you were to look at synergies, their variable costs are very much in line. It's a fixed cost because of, again, scale issue. Combination of that, combination of being able to offer our products to their distribution eventually post regulatory approvals and thereby increasing on productivity, deep connect with their distribution, and so on. That's as far as what was the rationale part of it. In terms of your valuation, I think comparing with some deals that might have happened four, five years ago, I think market has moved significantly.
Today, the deal has happened at a 35% discount to market multiples. This is excluding HDFC Life in that bucket of companies. Excluding HDFC Life, the listed players and proxy listed players, it's a discount of 35%. They have 10 lakh customers. Number of policies that they have is fairly formidable. Also that's the point in terms of number of customers. Being able to, with our ability to cross-sell, up-sell various products as they are rolled out of our stable and which don't exist in that company today, is really the USP of this deal. Niraj, anything you want to add?
No, Vibha, you covered it. I think in terms of agency, we all realize in terms of how challenging it can be to build a balanced agency franchise that we have with a lot of work over the past few years. A 40% accretion to that is not a small number. It would have organically taken a fair bit of time, anywhere between 18-24 months to build that kind of scale and that kind of quality. You need to put that in perspective as well.
Got it. Thanks and all the best.
Thank you. The next question is from the line of Suresh Ganapathy from Macquarie. Please go ahead.
Here, FY 2021.
Suresh, hi. Are you there?
Yeah, I'm there. You're able to hear me?
Yeah, go ahead.
Yeah. What is the operating ROEV for FY 2021 for Exide Life? Hello?
Yes.
Yes.
Suresh, some of these numbers are not in the public domain. As you'll appreciate, until the deal is done, it would not be right to put some of those numbers in the public domain.
Yeah. The reason, Vibha, I'm asking this question is because if you're saying you're paying a 30% discount, I have to look at it in the context of ROEV. For example, you guys generate 18%, the other players also generate a good 17%, 18%. We just wanted to have a like-for-like comparison because we want to know whether the business is actually profitable or not.
Yeah.
That's where the metric becomes very important. Yeah.
Right. Rather than ROEV, I think I can share that their new business margins last year have been accretive. For a company of that size, it's in the positive zone. The pre-overrun margins are very much in line with our pre-overrun margins. The context of what I mentioned, if you look at their cost ratios, their cost ratios are about 60% higher than our cost ratios. Just in terms of scale benefits that can start coming through and thereby reducing the overrun. Given the robust nature of their pre-overrun margins, this should be accretive. We think variances are negligible, very much under control. That's, I guess, your answer in terms of the ROEV.
Okay. The other question is, because, of course, it looks like the biggest reason for acquiring this company is the agency channel, right? And the scale that you get and the subsequent benefits. Can you clarify again, can you give comparisons as what has been the agent productivity, agent persistency, all the comparable metrics for Exide? I'm sorry I'm asking these details because these are very important from an acquisition merit point. Yeah.
Yeah. Their persistency has been steadily increasing, especially the 13-month persistency. Their 51st month persistency is still being worked on. There is a lag versus I think comparison with the top three listed players also. Within their set of size of companies, they're very much in the zone. The 13-month persistency, that's in the public domain anyway. That is, you can see that it is steadily continuing to increase. It is right now at about 73%. I forget what your other question was. Yeah. In terms of productivity, their productivity is higher. When I say that this is going to add 40% to our APE, sorry, 38% to our APE and 40% in terms of their agents. Their agent productivity is slightly at a lower clip.
That's where we see opportunity also, given the bouquet of products for us to be able to offer that to the agents and increase the productivity. Whether it is in terms of persistency, whether it is in terms of expense ratio, whether it's in terms of productivity, we see a delta that is reasonably low-hanging fruit, and that is a rationale for us looking at this transaction. They've also been profitable for the past six, seven years. Their embedded value that they have also disclosed that has been validated by Towers Watson, and reasonable amount of comfort on the back book to your question, back book unwinding as well. Therein lies the upside. If you look at it, Suresh, if there's an entity that is very similar to where we are today, then the economics become very different.
The whole rationale for this is we see that upside post-merger.
Sorry, one last question, if I can squeeze in. Have you done the due diligence with respect to COVID related claims on the book? Which obviously you have done, but I'm just asking, is it well provided for, fully captured in the INR 2,700 crore embedded value?
Yes. We have looked at the COVID claim, very similar to what the industry has gone through and well provided for. Yes.
Okay. Thanks.
Not taking into account wave three similar to us, if there is a wave three.
Okay, fine. That's it.
Yeah.
Thank you.
Thank you.
Thank you. The next question is from the line of Deepika Mundra from JP Morgan. Please go ahead.
Hi. Good morning. Thanks for taking my question. Just one thing. You mentioned the difference between the pre or overrun margin and the actual VNB margin. Can you outline a time frame and plan to basically converge the two and bring it in fold with HDFC Life margin?
Let me just put the timeline. We are expecting maybe a six-month timeline before getting regulatory approval for it to become our subsidiary because the day zero happens at that point in time. If you're looking at day zero, around January 1st, we expect over a period of time between 12-15 months kind of a time frame for normalization to happen. Somewhat some level of stretch is there. That's the kind of time frame from today. From today, six months, and thereafter 12-15 months for the normalization. It is 10% of our business, we do expect us to anyway, meaning HDFC Life standalone to anyway continue on its trajectory of margin expansion.
Okay. Basically if I got that right, after you merge it, about 6-8 months to get the margin in line with the HDFC Life reported margin.
No, it will be closer to 12-15 months thereafter.
Okay. Got it.
Yeah. Merger will happen six months from now is when we are hoping it'll become our subsidiary. Full synergies will start coming through once the actual merger happens. That's why. Earliest 12 months, outer limit is 15 months.
Okay. You mentioned that they're primarily in traditional and in the protection segment. Given that it's an agency dominated model only, what is the plan for further product mix enhancement from Exide?
They have astonishing level of, I mean, for a relatively smaller company, they have about 11% of protection. They have done pretty well on that. Roughly about 70 odd percent is par, about 13% non-par protection, like I said, 11%, and Unit Linked is very small, 5%. That's why, again, the attractiveness of the way they've run their product mix. Would continue to see. Once it becomes our subsidiary, it just, like I said again, becomes easier. Until then, I think they will continue on their product mix the way they have done, increasing protection, I would assume. Continuing to grow on that front and otherwise the product mix is fairly similar, keeping a lid on Unit Linked and thereby ratcheting up in terms of their new business margins.
Okay. Just last question from my side, given that we've been more cautious on adding the protection business, you're comfortable with the overall pricing underwriting in the past for Exide in the protection line?
Yes, because they actually retain lesser risk than we do on their books.
Okay.
They reinsure more.
Okay, great. Thank you so much.
Sure.
Thank you. Participants are requested to please limit the questions to 2 per participant. If you have a follow-up question, you may rejoin the queue. The next question is from the line of Abhishek Saraf from Jefferies. Please go ahead.
Yeah, thanks for the opportunity. Actually, 1 of my questions pertained to the product mix itself, which you answered earlier. I just wanted to understand, there is obviously benefit on the agency side that you mentioned. On the product side, is there anything probably Exide is bringing to the table? Is it mostly they have similar kind of products. You obviously dwelt about the product mix as such in terms of percentages, but are there any products which probably they might be adding to HDFC Life's table? Second, if you can just give us some details on their distribution mix. I understand it's more agency-driven, but if you can give me some specific percentages around that will be very helpful.
Yeah, sure. On their products, yes, we also have some aspects to learn from them once the CCI approval comes through. From an outside-in perspective, they do have some interesting products, especially in terms of Term ROP. Also, they have similar products with some variations to our Sanchay Plus product. Over a period of time, every company does build from the base. If HDFC Life has been the 1 to introduce a product construct like Sanchay Plus, then building from that continues to happen. That's exactly what we see in Exide Life as well. Some features which are enhancements over the base that we have will always be there. In terms of your question on distribution. Currently about agencies, around 60%, the broker channel is about 23%, corporate agency like an SVC and others is 7%, and the direct channel is 10%.
Sure, ma'am. Thanks a lot.
Thanks, Abhishek.
Thank you. The next question is from the line of Adarsh Parasrampuria from CLSA. Please go ahead.
Hi. Good morning team. Good morning.
Morning.
Yeah. Good morning, ma'am. Question on, if I go back to what HDFC Life was trying to do with Max, it was trying to enhance agency. That was one of the rationales along with the size at that time. Now one of the rationales is agency, and there's been a lot of time transpired between the two. Right. Organically, where have we gone in terms of ramping up that business because, just going by the size of agency or the business generated, we've been a little behind. Just wanted to understand how organically the agency is being built and how much of a hole does it plug for us or how much of a gap does it fill for us?
I'll start off and then I'll request Suresh to add. The agency channel amongst the top four or five players is in two parts. The top three players sell significantly more Unit Linked products, anything between 50%-75% and upwards. We have always believed that each one of our channels has to be standalone company level margins. That's exactly what our agency channel is, a high quality margin NBM equivalent to company level or slightly higher. By that construct, what it means is that we might be in the number 4 position, but as a strategy, that is the intention. You will find a steady growth like I just covered, wherein we have been growing anything between 40% or thereabout in our agency channel, even against the pandemic.
If you look at a CAGR, we have grown at a fairly respectable 20% CAGR while ratcheting up on our persistency. Our persistency of agency channel today is better than our company level persistency above 90%. That was not the case during the period that you're mentioning, which is about five, six years ago. Our persistency was significantly lesser. A holistic growth of our agency channel in terms of both APE growth, persistency, product mix and hence growth in VNB and having company level margins. That was the objective, and to have a balanced product mix. In our experience, it is not that difficult to grow any channel, why only agency channel, if one is focused on the top-line growth.
It is infinitely more difficult to grow it sensibly so that one is not yo-yoing in terms of back and forth on reducing anything. It could be, for example, big ticket size cases, which agency channel used to sell a lot of. Then a lot of companies realized that this isn't good business, it isn't persistent business, and so on. Rather than that, I've been issuing still getting it right. Also, if you look at the bottoms-up approach in terms of our agent base, that has doubled over the past four to five years. Like I mentioned, in quarter one, we were the highest in terms of number of agents added in the private space. There is a very calibrated approach, and that's why this opportunity makes a lot of sense because we have brought our agency channel organically up to this point.
We will continue to grow by that 20-odd percent CAGR that we have been growing. This will give us a fillip of about two to three years.
Vibha, if I can add, I think you broadly covered it. Just to give the background that we have been speaking on, our idea has been to diversify our distribution. The focus on the proprietary channels has been considerable over the last four, five years, especially on the agency channels. Like Vibha mentioned, we have managed an absolute CAGR growth on agency. The number of new and active agents has been consistently increasing. The quality of the agency book has been improving. Of course, in parallel, we have ensured that our banker partnerships continue to grow, as well as new partners on the bancassurance side. Even with that, the way agency has grown, they have shown a marginal increase in terms of % contribution to our overall business.
What the Exide distribution will bring to our end is clearly a number of new active and vintage agents who are available. We can leverage their existing product as well as our product base. There are a lot of agency-led programs that we have running. We have learned agency. If you remember, at the time of the Max merger, our agency was much smaller and probably even in consideration to Max. Now we are the number one non-UL agency business in the market, and a very profitable and high quality one at that, at 90% persistency. We do believe that given the distribution which will come in in markets where we would want to have a further presence with the kind of programs and of course, not to say even Exide has been running a fairly good agency model.
The best practice of both will come into play. Product mix, like we have always mentioned, will be balanced. We'll continue to focus on the core products. They have a fairly good par and protection business which comes in. All in all, you would think that organically we will be able to continue our growth in all the other markets. It's not that even organic in south for us will not grow. We will continue to grow that. Clearly a fresh distribution channel which comes in will increase our agency presence overall.
That's helpful. Okay. Thank you so much.
Thank you.
Thank you. The next question is from the line of Sanketh Godha from Spark Capital. Please go ahead.
Yeah. Thanks for the opportunity. Just, Vibha, given the whole story is about cost significantly improving in Exide Life and probably bringing it at par with HDFC Life in next 12 to 18 months after the merger gets done. Since I just wanted to understand what are the low-hanging cost levers you can see in Exide Life which can be substantially improved to bring back to the similar ROEs what you are reporting or similar VNB margins what you are reporting. That's one what I have. The second thing which I wanted to have is that whether Exide Life has a locking period after the deal, the 4% what they will effectively be owning. Finally, what's the logic of paying cash again given you could have easily done a share swap deal. Any reason why we are paying INR 700 of gross cash for the deal?
Yeah, those are the questions I have.
Sure. Thanks, Sanketh. I'll answer the questions two and three, and Niraj can address the cost issue. In terms of the lock-in, there is a one-year lock-in for them. What we understand from the counterparty is that they're very happy to stay as our shareholder. There's a huge untapped opportunity in insurance, and they're very happy to continue into the foreseeable future. This is really a question for them.
All right. The second aspect is on the cash. What the sellers wanted and had requested is that they would like to be cash neutral as far as the tax outgo. There will be a tax outgo for them. This is just back solving for the tax that they would have to pay for the transaction. Niraj, you want to take the aspect on cost synergy?
Yeah, sure. Sanketh, clearly, like we've discussed, the rationale for this is complementary geographical presence as well as accretive distribution. The focus primarily is going to be to, of course, get all the regulatory approvals in place and consummate the merger while preserving value. Along the way, synergies will get realized. Vibha did mention about the difference in cost structures because of the scale. That is something that will find its way in the merged co over a period of time. Primarily, as you would be aware, there would be synergies around common operating costs on infrastructure
There would be around, logically any sort of synergies that would come along the way in terms of once the merged co takes effect in terms of human capital over a period of time. Some of these things will pan out in the course of the time that we've mentioned. Primarily, the idea is to be value accretive. For that, there'll be two aspects, operating synergies of course, but also in terms of product mix optimization. These are the two levers which will be used to try and get while the VNB accretion will happen from day one. There will be a time to get the margins close to the level that we are at. That's going to be a factor. These two things will play a role there.
Got it. Niraj, any branch rationalization or employees related stuff, which you can highlight that would probably significantly improve our surplus cost ratio similar to our numbers then.
Yes. Clearly there are opportunities in the areas that you mentioned, Sanketh, but we will have to spend time to try and get through that over a period of time, as you would appreciate. Priorities definitely would be to first get in the relevant regulatory approvals and put in the business in motion without losing any value. Alongside that, all this happens, there are areas that you did mention apart from what I spoke about, that will work in tandem with the opportunity to optimize product mix, to be able to get the value to where we would like it to be.
Got it. Thanks. That's it from my side.
Thank you. A request to the participants to please limit a question to one per participant. The next question is from the line of Nitin Aggarwal from Motilal Oswal Securities Ltd. Please go ahead.
Yeah. Hi. Thanks for the opportunity. Just to introduce HDFC Life considering that IRDA may now look at the brand with a different lens considering the pending permission for the deal.
Sorry, I wasn't able to hear first part of your question. Can you please repeat?
The question is, will there be any delay now in securing approval for any new product launch that we may want to do given that IRDA will look at the entire transaction closely and till the time this done, they may want to move things slower?
I don't believe so. Product launches are business as usual while an overall capital deal at a company level is on a different track, so I don't expect that.
Okay. Will there be any issue to HDFC Limited in terms of the future holding considering that they have recently diluted in HDFC Life? In terms of their stake, any problems with that do you see?
No, none at all.
Lastly, what is the movement in solvency maintenance with this transaction?
Srini, you want to take that?
Their solvency is higher than ours. We expect it to be broadly similar since their size is likely 10% of our size. Having said that, there is some cash payment expected to be paid out as part of this fee. That might have a slight drop in the solvency. We believe that the cash flows that the company generates will be sufficient to at least partially offset the drop in the solvency. We believe it will be broadly similar to what it is now.
Thank you. The next question is from the line of Nidesh Shen from Investor. Please go ahead.
Just one question. On the EV accounting, whether we will add the EV line by line or there will be acquisition and creation of goodwill in the EV post-merger.
Neeraj, you want to take that in terms of the accounting? I think you are talking about EV or you are talking about how the consolidation happens because line by line means are you referring to the book consolidation or embedded line?
Yeah. I'm more talking about EV. The EV of the merged entity will be just line by line number of EV or in the adjusted network there could be a possibility of goodwill getting accomplished.
No. There are two different lenses exactly like Vibha mentioned. On the EV basis, it'll be largely line by line. Of course, there will be methodology which will get completely aligned to one. Whatever adjustments need to happen for that will happen. As you're aware, this EV has been reviewed by Towers Watson on a APS 10 basis. There is fair amount of consistency in terms of what we would be doing at our end. As far as on the accounting side is concerned, there are options that are being evaluated as we speak in terms of how to recognize the transaction because all of that is anyway subject to regulatory approval and later on court approval. We'll find the due treatment in the next few weeks.
Sure. Just one more question, if I can add. Is on the agency side, these agents will be automatically transferred to HDFC Life company or they will require to take IRDA examination again to become a part of HDFC Life's agency?
No, we don't believe that they will require to be recertified.
Sure. Thank you.
Thank you. Participants are requested to please limit your questions to one per participant. The next question is from the line of Rishi Jhunjhunwala from IIFL. Please go ahead.
Just a couple of quick questions. One was, you mentioned that you'll be able to bring the margin levels for Exide to your Exide Life level over the next 12-18 months once the merger completes. Just wanted to understand, is the difference between both of them only the high cost ratios and the product from a profitability perspective is largely similar otherwise?
Yes. It is largely similar, except for persistency. Their persistency, like I mentioned, 13-month persistency is hovering around 75% versus a much higher number of 90%. As that starts going up, at least on new business, margins should start converting once scale economies flow in.
Sorry to interrupt. May I request Mr. Rishi Jhunjhunwala to please rejoin the queue. We have participants waiting for their turn. Thank you. The next question is from the line of Mallika Jadhav from Elara Capital. Please go ahead.
Hi. Thank you for taking my question. First, can you repeat the channel mix again? Second, you also mentioned that you are adding a lot of cooperative bank relationships. Can you elaborate a little bit on that?
Yeah. The channel mix that I talked about earlier is agencies about 60%, brokers about 23%, corporate agents is about seven, and direct about 10. I did not mention that they are adding a lot. I said they have some relationships, like SVC, for example.
Yeah, what I meant was that you would add them as a result of this merger.
It's given their strength in the South and also amongst categories like that. Yes, post regulatory approval, we will of course want to make inroads into geographies and in relationships that we haven't, for whatever reason, been present or have not got there or have been more metro-focused and so on.
Got it. Most of my other questions have been answered. Thanks a lot for this.
Just to add on there is that more than 60% of their business comes from tier 2 or 3. That also is an interesting aspect for us.
Right. Thanks.
Thanks.
Thank you. The next question is from the line of Ashok Frederick from VNK Securities. Please go ahead.
Thanks for the opportunity, ma'am. I have just one question. They have 60%+ in tier 2, tier 3, and we can obviously see that in protection pricing. They're very expensive out there. They have a higher share of protection also. Once you have onboarded them, how will our pricing dynamics move versus what we have right now on your term? Will a higher price impact our demand going forward? That's my question. Thanks.
I would say that we are some way away. They do sell predominantly ROP and that's also something that we sell. It's not that it is completely an area that they sell something we don't and there's a very different strategy. That's not the case. I think we're some way away from it, like I mentioned. What we know is that the product strategy and outreach is not something that, like I said, it's not apples and oranges. It's very much in the zone, and we'll have to calibrate it through our clean teams and until we get regulatory approval to some extent be on the back burner.
Thereafter for us to be able to look at for what kind of new distribution relationships, from a HDFC Life point of view, what is the product suitability, what are typically persistency ratios, what is the charge extraction margins, all of that. That homework will happen over a period of time. From a diligence point of view, we believe that it's very much in the zone of the kind of products that we have today.
Thank you. That's it from me.
Sure.
Thank you. The next question is from the line of Nischint Chawathe from Kotak Securities Limited. Please go ahead.
Hi.
Hi, Nischint.
Hi. Just a couple of questions. One is that, what kind of adjustment to EV are we expecting when you sort of actually sit across the table? Any broad adjustment given the fact that somewhere the basis could be a little different. If you put some color on that. The second is, how do we think about the IRR of this deal? The third would essentially be that for this particular company or if this becomes maybe an SBU now within HDFC Life, what maybe proportion or % of cost reduction should we really see so that your nominal margins are equal to the net margins? I mean the net margin are equal to nominal margins.
Yeah. On your first question, we don't expect any significant adjustment to EV. Maybe 5%, up to 5%, anything between 1% to 3%, something like that, as we get, if at all. It's not that we know of something, but supposing some mortality experience given COVID or aspects like that. We don't expect a material impact to the EV. On cost reduction, just in terms of numbers, they are somewhere around 20% overall cost to revenue, and we are in the zone of 12%-odd%, 12%-13%. It should normalize closer to our numbers.
Sure. How do we think about the IRR of the deal? I guess when you started evaluating it, how do you think about it?
This is IRR for us or for the seller?
Yeah, that's right. I'm guessing you would have looked at this company or some other companies. When you looked at IRR of this deal at this valuation, how did you think about it?
Without giving out too many because ultimately a deal is a commercial closure, right? This is value accretive for us, and that's how we saw it in terms of if we were to, after taking the steps and like I mentioned, 15-odd months after it becomes our subsidiary for us to be able to eke out those synergies makes it fairly value accretive. Of course, it's 10% of our business. That business is value accretive. Also the multiples, like I mentioned, are at a discount to listed peers, significant discount. Thereby very much in zone. There is a cost synergy. There is more importantly a productivity synergy or a productivity upside that comes in. All of that put together was accretive, and that's why we're looking.
Can't really share in terms of underlying because that might be a starting point, but then there are negotiations.
Perfect. Congratulations on the deal and all the best.
Thank you, Nischint.
Thank you. The next question is from the line of Avinash Singh from Emkay Global. Please go ahead.
Yes. Hi, good morning. Again, going on valuation. Of course, as you mentioned, it's at a material discount versus listed peers, but those listed peers have a different kind of profitability, a brand, and most importantly, the bank as a distribution. There, if I were to look at Exide Life, probably the quality of EV is not comparable to them or to yours because a large part, the risk would be relatively lower. Additionally, if I look at the market structure of life insurance side, probably beyond the top eight, almost the rest of the 14, 15 players are struggling and kind of available for sale. It's a more or less buyers' market, and within that also, there'll not be many of the top eight who are currently interested or have the ability to buy out. Under these circumstances, how do you see this valuation?
The next question connected to this is that, okay, if you see that Exide Life Insurance is adding value, then out of those 14, 15, there are many names. Are you still open to looking out for further more deals? Thank you.
Okay. Just to put things in perspective, while this deal is still a long way away in terms of regulatory approvals, you're aware there's no deal that's happened in life insurance yet. There are multiple reasons for that. We have articulated our considerations for a deal, and I would suppose that would be for any rational player in terms of a good quality back book, distribution franchise of quality, as well as possibility to do a deal given shareholding structures that could be prevailing in different companies. There are reasons why deals have not happened yet. When you put that in perspective, for us, organic growth is something that we have been doing reasonably well at, and inorganic is a way to kind of complement that, as Suvra mentioned. Is this going to be a strategy for us on an ongoing basis?
I guess short answer is yes. We need to be very cognizant of all the steps that are involved in a particular transaction. We'll take things in due course. We obviously keep scanning the market for opportunities from time to time. We have continued to do that, and we'll do that in future as well. To your earlier point in terms of quality of the book, I guess it is always a challenge when for underserved players, not too much is available in the public domain. You do end up making judgment calls based on limited information that's available. Having conducted due diligence and taking comfort from an external review of the quality of the back book that has been certified, we believe it's a fairly high-quality business that's been built.
There are considerations on scale, which, like you rightly articulated yourself, at a combined entity level, a lot of those constraints will not apply. That's where the synergies would come in over a period of time.
Thank you. Ladies and gentlemen, this will be the last question for today, which is from the line of Shyam Srinivasan from Goldman Sachs. Please go ahead.
Hi, good morning, and thank you for taking my question. Just one. I'm looking at agent numbers for Exide and HDFC Life over the years, right? Fiscal 2017, both of you had a similar number, around 53,000, 54,000, and you've grown at 20%, and they've declined 9% CAGR, right? Last three years have been pretty stark. Given the rationale for the deal is a large part on agency
If you can talk a little bit about what's happening there, why have they seen this kind of a decline and maybe possibly going forward, how can this be turned around?
Suresh, you want to take this one?
Yeah. I think that will work. Yeah. I think there are two parts to the overall agency business. One is the incremental number of active agents who we are recruiting. The second is the productivity that we are able to get from all the agents who have been previously onboarded. At HDFC Life over the last four, five years, we've been working on the agency model quite extensively, both in terms of new acquisition and two, in terms of getting the productivity of the existing agents. We've learned a lot in terms of how we need to onboard and how we do retain and keep them active. The way we look at this business is that look, there is always an opportunity to grow the agent base. The equation is fairly simple.
I mean, you need to get more agents who need to get more active and you get to get a higher productivity. The overall value proposition in terms of what kind of products do you sell, how do you train these agents, how do you make sure that they remain active with you, they work on their customer base. Which is one of the reasons we are not so concerned in terms of that active agent base. We do believe that once we come in, we will be able to work with them and try and also increase their active agents as well as the customer for the active agents. We've run that model. In fact, we had mentioned this in one of our earlier discussions.
We run this whole program called Agency Life, which is about actively looking at all the agents in terms of how do they engage with the insurer. We do believe we can replicate some of these programs. Of course, for us, the market is large. While almost 26% of our agency business is also in the South for active agents, we do believe that this will give us an incremental 15% growth in that particular market. Once our product range comes in, once our programs come in, it'll lead to a cycle where we not only get their productivity higher and hopefully we're able to onboard customers through their sales team. These are things we frankly, for us is incremental, and that's the way we have been looking at it.
Past really, we can't do much in terms of how much incremental financial consultants they have been able to board, but we are fairly confident given our overall brand, given our product proposition, we'll be able to correct that as we go forward.
Thank you and all the best. Thank you.
Thanks.
Thank you. Ladies and gentlemen, as this was the last question for today, I would now like to hand the conference over to Ms. Vibha Padalkar for closing comments.
Thank you. We would like to thank all of you for participating in today's call. We'll keep you updated on the progress of this transaction. In the meanwhile, if there are any further questions, do reach out to Kunal Jain of Investor Relations. Thank you and stay safe.
Thank you. On behalf of HDFC Life Insurance, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.