MSCI tweaking the rules on handling corporate events like mergers & acquisitions (M&A) is likely to remove the technical overhang on HDFC Bank post its merger with HDFC Ltd, believes brokerage house Macquarie Capital Securities (India) Pvt Ltd.
As per the new rules of MSCI, when a corporate event occurs, which has an impact on index constituents, non-index constituents that are involved in the event are taken into consideration for immediate inclusion in the MSCI Global Investable Market Indexes.
However, the non-index constituents must comply with all eligibility requirements for index constituents.
“What these new rules imply is that HDFC Bank will be considered as an extension of HDFC post the merger and the foreign headroom requirement will be that of an existing constituent,” Anjali Sinha, Head of India Equity Sales at Macquarie, said in a note.
“The net impact will be that the weight of HDFC merged entity in MSCI could be double the weight of HDFC in MSCI currently,” said Sinha.
According to the brokerage firm, the weight of the HDFC twins will increase from 5.78 percent to 13 percent, resulting in additional flows.
The HDFC twins rose more than 5 percent each on Friday on high optimism with investors expecting higher capital flows on merger than what was earlier anticipated.
On April 4, HDFC Ltd announced that its board approved a merger with HDFC Bank. Post the merger, all the associates and subsidiaries would be transferred to HDFC Bank.
“The proposed transaction is to create a large balance sheet and net-worth that would allow greater flow of credit into the economy. It will also enable underwriting of larger ticket loans, including infrastructure loans -- an urgent need of the country,” said the company in an exchange filing.
Further, the brokerage house remains bullish on HDFC Bank stock as it continues to report robust profitability and earnings growth.
“At a time when the system is struggling to get deposits and most of HDFC Banks peers have reported just 10% YoY deposit growth, it has reported 19% YoY deposit growth for 2QFY23, and continues to generate 2%+ ROA,” said Macquarie.
According to Mintgenie poll, an average of 37 analysts recommend ‘strong buy’ on the stock.