Shares of Housing Development Finance Corp (HDFC) and HDFC Bank shed over 5 percent each on Friday, May 5, 2023, becoming the top laggards in both benchmark indices - Nifty and Sensex.
HDFC twins tanked after the MSCI announced that it will use an adjustment factor of 0.50 (vs the expectations of 1) for computing the weight of the merged entity of HDFC Bank and HDFC.
This would mean that it would see no incremental inflows. Rather, the addition may result in outflows of $150 to 200 million, a report by brokerage house Nuvama explained. This led to investors turning cautious on the twins leading to a panic selling.
HDFC Bank lost as much as 5.7 percent to ₹1,628.70 in intra-day deals on BSE. Meanwhile, HDFC fell as much as 5.3 percent to its intra-day low of ₹2,710.
"Based on the estimated post-event foreign room of HDFC Bank and pursuant to the MSCI Corporate Events Methodology, to reduce the risk of reverse turnover, MSCI intends to add HDFC Bank to LargeCap Segment of MSCI Global Standard Indexes with a FIF of 0.37 after applying an adjustment factor of 0.5," MSCI said in a statement.
Had the adjustment factor been 1, the Street had expected the combined entity to see net inflows of $3 billion on MSCI addition.
The brokerage house further analysed that HDFC's weight is 6.74 percent in MSCI India index but the merged entity would have slightly lower weight of about 6.5 percent.
"We had estimated the foreign room for the merged entity to be around 18 percent which is above 15 percent and also above the MSCI threshold to maintain stock with full factor. However, 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 percent," Nuvama noted.
Meanwhile, CLSA also stated that as per an update from a global index provider, the combined weight of HDFCB + HDFC in global indices is expected to remain largely stable (marginally down).
"This is contrary to the general expectation of an increase. Therefore, this will lead to marginal outflows vs expectations of $3bn inflows. On merger dispensations (link to note), RBI has allowed phasing out of LCR over a three-year period and CRR/SLR will be applicable from the effective date. With index inclusion and clarity on RBI’s merger dispensations, we expect the focus will be back to fundamentals. The stock trades at 17x+ FY24CL PE, which we believe is fair for the 16-17 percent growth trajectory that the merged entity could have over the next five years," it estimated. However, it prefers ICICI Bank over HDFC Bank on the back of lower valuations.
It further added that the decision of keeping a lower adjustment factor of 0.5x is done with a view of preventing excessive volatility and the same will be reviewed post the transaction completion.
Other experts also believe that this correction is short-term and can be used as a dip to accumulate both bluechip stocks. In the long term, both HDFC and HDFC Bank have robust outlooks.
