How much money will flow into the HDFC Bank-HDFC merged entity after the MSCI plan?

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

This is lower than HDFC’s current weighting of 6.74% in MSCI. HDFC Bank is currently not a part of the index, however, it was expected to be after the acquisition of HDFC Bank.

The latest MSCI report has raised fears of some outright foreign fund outflow in the HDFC Bank-HDFC merged entity.

“The HDFC twins were hit in Friday’s trade following reports that MSCI was trading with a “limited investment capacity factor” of 50 per cent against market expectations of 74 per cent,” said Dr VK Vijayakumar, chief investment strategist at Geojit Financial Services. shall include the merged entity in its index.”

He said, “Since the sale of around HDFC Bank shares worth 2000 crores are expected, the HDFC twins will be under pressure in the near term.”

On Friday, the share prices of both HDFC Bank and HDFC declined by around 6%. 1,625.35 and 2,701.15 respectively. The shares lost market value of crores.

HDFC Bank’s market cap was wiped out by May 5 9.07 lakh crore, while HDFC’s m-cap was eroded 4.95 lakh crores.

However, in the full week ended May 5, HDFC Bank share price declined by around 3% and HDFC share price declined by 2%.

Further, Abhilash Pagaria, head of alternative and quant research at Nuwama Wealth, estimated that the foreign room for the merged entity would be around 18% which is above 15% and above the MSCI threshold to make a stock with absolute factor Can be kept “As per the current practice, the weighting of the merged entity would again be reduced in the index review in the next quarter if the foreign room falls below 15%,” he added.

Foreign investors have so far shown resilient buying in Indian equities. Whether the outflow in HDFC twins will affect the inflow of foreign funds into the market will be keenly watched.

Vijayakumar said, “India outperformed most markets in April. The main reason for the outperformance is sustained buying by FPIs. In the last seven trading sessions i.e. from April 26 to May 5, FPIs have bought equity value. 11700 crores.”

He believes that FPIs can continue to buy in India. A strong rupee and good Q4 results will help increase capital inflows into India.

read here, pump fpi 10,850 crore in Indian equities in just 4 sessions in May; DIIs have become net sellers so far

HDFC Bank will merge parent HDFC into its fold to enable seamless delivery and leverage of home loans to HDFC Bank’s large customer base. The merger is meant to create a larger balance sheet and net worth which will allow greater inflow of credit into the economy. It will also enable underwriting of big ticket loans including infrastructure loans, which is an urgent requirement of the country.

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

Housing finance giant HDFC reports 20% rise in net profit in Q4 FY23 4,425.50 crore as against 3,700.32 crore in the same quarter of the previous fiscal. As on March 31, 2023, the assets under management were 7,23,988 crore as against 6,53,902 crore in the previous year. While personal loans comprised 83% of the AUM.

On HDFC stock price, Nuwama’s note said, “We maintain ‘Hold’ and expect our FY24-FY25E EPS to grow by 2-4%, achieving a revised TP. 2,820; 2x BV FY25E ( 2,700 earlier). The merger narrative will increase the stock price. Historically, entities that have been merged have traded at a discount to the merger ratio. We believe the risk-reward is equally balanced for HDFC.”

While Prabhudas Lilladher said, “HDFC saw a good quarter with core PPOPs outpacing PLE by 12% led by better NII/NIM and higher assignment income. Asset quality was strong as GNPAs improved QoQ due to higher realisations.” reduced to 1.2% from 1.5%.AuM growth was soft at 9.2% YoY due to an 11% decline in net non-individuals, which has gone down to comply with the merger.

Prabhudas’ note said, “We see better AUM growth at 12% in FY24/25E as 1) a large number of run-downs have been impacted and 2) HDFC expects to maintain the home loan momentum. Company will need to build LCR before merger. Since LCR as per bank norms is ~75% (128% is stated). While we await clarity on LCR to assess NIM impact, HDFCB has additional SLR is. With core RoE at ~14%, valuation at 1.8x. Keeping multiple at 2.3x, we shift to March 25 core ABV and increase TP from Rs3,000 to Rs3,200. Keep shopping.

The merger is expected to come to fruition in July this year.