How much funds outflow will HDFC Bank-HDFC merged entity see after MSCI plan

New York-based global indexes services provider, MSCI earlier this week announced to add HDFC Bank merged entity in the large-cap segment of its Global Standard Indexes with a weightage of 6.5%. Further, there is foreign inclusion factor (FIF) of 0.37 for the merged entity after applying an adjustment factor of 0.5.

This is lower compared to the current weightage of 6.74% of HDFC at MSCI. HDFC Bank is currently not part of the index, however, was expected to be after acquiring HDFC.

The latest MSCI report has escalated fears of certain lumpsum foreign funds outflow in the HDFC Bank-HDFC merged entity.

Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services said, “HDFC twins were impacted in Friday’s trade on reports that MSCI would include the merged entity in their index with a “limited investability factor” of 50 percent against market expectations of 74 percent.”

He added, “Since selling of around ₹2000 crore worth of HDFC Bank shares is expected, HDFC twins will be under pressure in the near-term.”

On Friday, both HDFC Bank and HDFC share prices nosedived by nearly 6% each to end at ₹1,625.35 and ₹2,701.15 apiece respectively. The stocks lost crores of market value.

As of May 5th, HDFC Bank’s market cap stood at over ₹9.07 lakh crore, while HDFC’s m-cap was at over ₹4.95 lakh crore.

However, in the overall week that ended on May 5th, HDFC Bank’s share price tumbled by around 3% and that of HDFC plunged by 2%.

Also, Abhilash Pagaria, head of alternative and quant research at Nuvama Wealth had estimated the foreign room for the merged entity to be around 18% which is above 15% and above the MSCI threshold to maintain stock with full factor. He said, “as per the current methodology, the weighting of the merged entity would be again reduced in the next quarterly index reviews if the foreign room would have come below 15%.”

So far foreign investors have shown resilient buying in Indian equities. Whether the outflows in HDFC twins will impact the foreign funds flow in the market will be keenly watched.

Vijayakumar said, “India outperformed most markets in April. The principal reason for the outperformance is the sustained buying by FPIs. During the last seven trading sessions i.e. from 26th April to 5th May, FPIs have bought equity worth ₹11700 crore.”

He believes FPIs are likely to continue buying in India. The appreciation in the rupee and good Q4 results will aid in increasing capital flows to India.

Read here: FPIs pump in ₹10,850 cr in Indian equities in just 4 sessions of May; DIIs turn net sellers so far

HDFC Bank will merge parent HDFC in its ambit to enable seamless delivery of home loans and leverage on the large base of customers of HDFC Bank. The merger is to create a large balance sheet and net worth that would allow a greater flow of credit into the economy. It will also enable the underwriting of larger ticket loans, including infrastructure loans, an urgent need of the country.

Both HDFC and HDFC Bank have announced their last quarter earnings for FY23, with the parent being the latest one to do so.

In the fourth quarter of FY23, housing finance giant HDFC reported a 20% growth in net profit to ₹4,425.50 crore compared to ₹3,700.32 crore in the same quarter previous fiscal. As of March 31, 2023, the assets under management stood at ₹ 7,23,988 crore as against ₹ 6,53,902 crore in the previous year. While individual loans comprised 83% of the AUM.

On HDFC stock price, Nuvama’s note said, “We retain ‘HOLD’ and increase our FY24-FY25E EPS by 2-4%, which yields a revised TP of ₹2,820; 2x BV FY25E ( ₹2,700 earlier). Merger narrative will drive stock price. Historically, entities that are merged have traded at a discount to the merger ratio. We believe risk-reward for HDFC is evenly balanced.”

While Prabhudas Lilladher said, “HDFC saw a good quarter with core PPoP beating PLe by 12% led by better NII/NIM and higher assignment income. Asset quality was stronger as GNPA reduced QoQ from 1.5% to 1.2% due to higher recoveries. Net AuM growth was softer at 9.2% YoY due to 11% drop in non-individuals which has been run down to comply with merger.”

Prabhudas’ note added, “We see superior AuM growth at 12% in FY24/25E as 1) bulk of run-down has been effected and 2) HDFC expects home loan momentum to sustain. Company would need to build-up LCR before merger since LCR as per bank norms is ~75% (reported 128%). While we await clarity on the LCR need to assess the NIM impact, HDFCB does hold excess SLR. With core RoE at ~14%, valuation is at 1.8x. Keeping multiple at 2.3x we shift to Mar’25 core ABV and raise TP from Rs3,000 to Rs3,200. Retain BUY.”

The merger is expected to fructify in July this year.