Why are HDFC Twins Falling Today?: Shares of HDFC and HDFC Bank are down 5.5 per cent each on Friday. This comes after report suggested that MSCI has decided to use an adjustment factor of 0.5 while computing the weightage of the merged entity, against expectations of an adjustment factor of 1.
The post-merger HDFC Bank may see no incremental inflows, but outflows in the range of $150 million to $200 million, according to Nuvama Alternate Research.
In an overnight development, MSCI announced the potential treatment for the merger of the HDFC twins on the MSCI indices.
Global index provider MSCI intends to add the merged entity of HDFC Bank and HDFC to the large cap segment of MSCI Global Standard index. Addition to the index will come with an adjustment factor of 0.5.
Adjustment factor is the weightage of a stock assigned within a particular index.
Nuvama expects MSCI revising the adjustment factor to 0.5 from 1, will lead to outflows in the range of $150-200 million.
MSCI says it will continue to monitor the event and make further announcements as more information is available.
There were two scenarios before the MSCI, according to Nuvama. One – had the foreign room remained above 15 percent, the weightage of the merged entity in the index would have doubled, leading to incremental inflows of $3 billion.
Second, MSCI could have changed the methodology to avoid excess volatility. “Thus MSCI has gone ahead with reducing excessive volatility and changing the methodology,” according to Nuvama.
The National Company Law Tribunal (NCLT) has approved the merger of HDFC into HDFC Bank in what will be the biggest-ever amalgamation in Indian corporate history.
Exchanges have already approved the merger, which is likely to have a combined asset base of Rs 18 lakh crore.
What do Brokerages Say?
HDFC shares opened five per cent lower at the day’s lowest level at Rs 2,720, having closed at Rs 2,862.35 the previous day. HDFC Bank shares slid to as low as Rs 1,631 after starting the day at Rs 1,637, a steep decline from their previous close of Rs 1,727.2.
Most brokerages have a ‘buy’ rating on HDFC, with CLSA having set a target price of Rs 3,050.
According to Macquarie, which has an ‘outperform’ rating on HDFC with a target price of Rs 3,060, the focus remains on the HDFC-HDFC Bank merger, whose likely date is around July 2023.
Motilal Oswal Financial Services has a 12-month target of Rs 3,290 as it believes continues to have a strong ‘right to win’ in its standalone Mortgage business.
“The management shared that it has not witnessed any perceptible change in demand for mortgages, despite the high interest rates and that a large proportion of customers have seen only their tenor increase rather than any EMI increase. HDFC achieved its highest ever monthly disbursements in Mar’23 and expects this positive momentum to continue throughout FY24. Commentary on the existing mortgage demand has been divergent across the different lenders in the mortgage ecosystem,” it said.
We have increased our FY25 EPS estimates by 2 per cent to factor in lower credit costs. We expect HDFC to deliver an AUM and PAT CAGR of ~14 per cent each over FY23-25, which will translate into a core RoA/RoE of 2 per cent/14 per cent in FY25, it added.
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