Bajaj Finance Breaking Out Of Long Consolidation Period

Yesterday’s Market Performance

Nifty: 17377.80 I 54.20 (0.31%)
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In today’s issue, we discuss;

HDFC Life acquisition of Exide Life Insurance (& how the market reacted to the news)
Bajaj Finance breaking out of a strong consolidation period (a possible actionable point for you?)
Reliance Jio going on another buying spree ( it’s not in India)
And some technical analysis concepts to widen your horizon (not saying otherwise 🙈) Read along!

Welspun India: 137.25 | +11.15 (+8.84%)

The script jumped over 9% after the company received one of the stringent and most recognized quality approvals—US Food and Drug Administration 510 (k) clearance for its 3-ply surgical masks
ICICI Lombard: 167.55 | +16.85 (+11.18%)
- The share price shed over 4% today after the company received the final approval from the Insurance Regulatory and Development Authority of India (IRDAI) for the proposed scheme of arrangement with Bharti AXA General Insurance Company

HDFC Life completes acquisition of Exide Life Insurance; stock was down 4% on announcement day; what do we know and what does this indicate 🤓

What’s up?

India’s largest life insurer (not counting the beloved LIC of-course), acquired Exide Life Insurance from Exide Group for a total consideration of INR 66.9 Bn
The company will issue ~87 Mn new shares at INR 685 per share to Exide Industries, while paying INR 7.26 Bn in cash for 100% acquisition; P
Post completion, HDFC Limited will hold ~48% in the resultant entity, with Exide Industries holding ~4%

Why?

HDFC Life Management highlighted Exide Life’s strong agency network as a key rationale behind the acquisition, with the possible synergy expected to improve HDFC Life’s agency channel growth & productivity
Likewise, Exide Life is a strong player in Southern India (think: AP, Telangana, Karnataka and Tamil Nadu), with a majority of business from Tier 2 & beyond cities (>60% of business), helping HDFC Life build-out their footprint in these geographies
From an acquired entity’s perspective, acquisition by HDFC Life is forecasted to help bring down fixed costs for Exide Life (something the company has been suffering from lately), thereby improving profitability (of new business) by sitting on HDFC Life’s platform and leveraging economies of scale

Interesting! Cost vs Opportunity Rationale? 🤔

To give you context, the Top 8 Life Insurance players (think: SBI, HDFC, IPRU, Max, Bajaj Allianz, TATA AIA, Kotak, and Birla Sun Life Insurance) in the private sector space, control ~83% of the market, with the limited threat from newer / incumbent players (why??)
Distribution is key, with >90% of the above-listed players leveraging their banking/branch network (termed as Bancassurance in insurance lingo) to cross-promote their insurance products
With Exide Life, and other similar smaller players, the lack of a comparable distribution network is limiting, and reflective in increased cost of acquisition (especially during the pandemic), with limited growth on the retail front (think: poor persistency)
This is indicative of industry chatter pertaining to the sale/stress sale of smaller life insurance players (with expectations of more such transactions in the future)

Okay! Tell me more? Valuations? (Expy, not going to lie) 🤪

Exide Life is ~10% of the size of HDFC Life (across key metrics), with the cost of acquisition a mere ~3% of HDFC Life’s market cap, indicating the humongous size mis-match between the two players
Taking into consideration the limitations in Exide Life’s current business (think: limited brand recall, sub-par distribution network, lack of economies of scale), HDFC Life has acquired the business at a 2.5x June 21 P / EV (which is only a 35% discount to a market multiple of three listed players, IPRU, SBI Life & Max Life )
It’s expensive (to cut it short) and it sets a benchmark in case other large insurance companies wish to acquire the fringe players

Bajaj Finance is all set to give another mini-rally (That stocks going to the moon?!)😵

We cover the concepts discussed below in detail in the education section, check it out to get a good understanding of the set-up

Analysing Bajaj Finance on a weekly time-frame (last 20 weeks), shows that the stock gave a breakout after a long (8-9 week) consolidation in a tight range (view image below)
Breakouts on the higher side don’t always lead to a rally, if the prices do not sustain over important levels, the stock might slump, making it a fake breakout (always safer to use more than one technique to find confirmation, for eg. few more candlesticks or chart developments)
In the chart below, highlighted are three white soldiers, indicative of a bullish reversal sign (candles that are bullish in nature & the most effective in predicting stock movement after a good consolidation near support / demand zone).

Okay, that’s quite appealing. How can I be so sure about this breakout and where can I plan my entry and exit? (Sick q) 😥

Initially, we looked at Bajaj Finance on a weekly time frame, trying to ascertain the trend the stock is taking, we now analyse the stock on a daily time-frame (see image below)
Moving to a smaller time-frame (daily) allows us to identify possible entry points, in addition to catching the overall trend
Similar to what we saw on the weekly time-frame, on daily time-frame the stock is making a Flag pattern (prices after short rallies consolidate in a tight range (Accumulation) and rise after a breakout)
A flag is a price pattern that, in a shorter time frame, will move counter to the prevailing price trend (uptrend in this case), post which the prices will consolidate prior to moving in direction of the prevailing trend (see image below)
Looking at this trend, you could wait for a breakout on the higher side, getting confirmation on your analysis and accordingly taking a position; possible stop-loss just could be just below the low (see image below)

So should we keep track?🤔

Yess, Finding multiple confirmations while performing technical analysis on a chart is important and helps avoid traps
We started on a higher time-frame with overall price action and trend analysis and took second confirmation on a daily time-frame

Authors of this newsletter don’t own this name, and this above is not meant to be construed as a recommendation (not our style at FinLearn)

What else caught our eye? 👀

FPIs can’t stay away from India for too long

Foreign portfolio investors (FPIs) were net buyers in August to the tune of Rs. 16,459 crore (the majority of which was in the debt segment)
The reason for this preference towards debt is the rising spread between bond yields in India (10 year yield is above 6.2%) and the US (10-year yield is below 1.3%)
Experts believe that stability in the INR and high valuations in the equity market have also led them to favour debt.

Reliance looking to set foot in the European markets

Reliance Industries Ltd is looking to make an offer (worth $5.7 billion) to acquire a controlling stake in T-Mobile Netherlands which is the country’s largest telecom operator.
The move is believed to not only help Jio establish a share in the European markets but also help de-risk its business through diversification.

Saudi Arabia cuts oil prices to boost demand

Saudi Arabia lowered prices significantly, more than the Asian markets, in an attempt to attract more buyers.
They have suffered post the pandemic due to an uneven economic recovery affecting demand patterns.
Aramco’s biggest customers are overwhelmed by the scale of the price cuts which clearly indicate the Saudis’ intention to compete with other producers and grab market share.
Even though they predict a shortage by the end of the year, they are proceeding cautiously and increasing production gradually to avoid flooding the market.