Adhesive maker Pidilite Industries is likely to replace Housing Development Finance Corporation (HDFC) in the Nifty 50 index, a report by Business Standard stated. As per the report, this will be an ad hoc inclusion on account of the mortgage major’s expulsion from the Nifty index—tracked by funds with assets of over $30 billion—on account of its merger with HDFC Bank, which has entered final stages.
It is important to note that since both HDFC and HDFC Bank are members of the Nifty and Sensex, the merger will result in the number of index constituents dropping from 50 to 49 in the Nifty and from 30 to 29 in the Sensex.
“Pidilite is a high probability ad hoc inclusion to the Nifty index, with Tata Power a lower probability inclusion candidate,” analyst Brian Freitas of Periscope Analytics told BS.
Analysts, however, are divided on the treatment, the report said. A few brokerages said HDFC’s removal could lead to a $1.5 billion churn while some believe HDFC’s expulsion and increase in weightage of the merged entity will take place simultaneously to avoid churn, the BS report informed.
“Firstly, HDFC will be deleted from the Nifty. But passive trackers will not need to sell the stock since there will be an increased number of index shares for HDFC Bank and the passive trackers will receive shares in HDFC Bank for their shares in HDFC. We estimate the merged entity will have a weight of around 13.9 percent in the Nifty,” Freitas added. HDFC has a 5.5 percent weightage in the Nifty.
If the stock has to be removed the weightage will have to first be divided among all the Nifty components and following the completion of the merger, the weights of all index components will once again be reduced, the report further pointed out.
Sources close to the exchange said the index composition team is examining the issue, noted BS.
The merger between financial sector behemoths HDFC Bank and parent HDFC could be completed as early as this quarter or early next quarter.