HDFC twins fall on fears of outflows post merger

HDFC Limited will merge with HDFC Bank, and the merged entity will be called HDFC Bank. The merger is due in July. MSCI recently changed the calculation of direct investment limits for banks, known as ‘foreign room’, leading to outflows and fears of Friday’s sell-off.

The MSCI indices are closely monitored by foreign investors interested in Indian equities. The intensity of the selling was enough to push the 12-component Bank Nifty down 2.34% to 42,661.20, its biggest fall in seven months. Concurrently, the Nifty fell 1.02% to 18,069, its biggest fall in four months.

HDFC Bank Ltd., which hit a record high 1734.45 on Thursday, down 5.9% 1625.65 on Friday, the highest in 37 months. HDFC Ltd closed down 5.6% 2,702.3, the sharpest decline in 38 months. Investors in the so-called HDFC twins saw their wealth erode drastically 86,342 crores.

Current estimates predict a $150–200 million outflow, in contrast to earlier estimates of more than $2 billion in post-merger inflows.

Siddharth Khemka, Head, Retail Research, Motilal Oswal Financial Services Ltd. said, “After rallying in the last few days, Nifty is now consolidating around 18,000-18,200 zone.” Index heavyweights consolidated in the near term on subdued global cues and profit booking.

The expected outflow from the merged HDFC Bank is a result of revision in its weighting calculations by global index provider MSCI. The adjustment while determining the weighting of HDFC stock on the index takes into account the available foreign room-proportionate shares that foreign investors can still buy to the extent permissible.

The estimated foreign portfolio investment holding for the merged HDFC Bank is around 61%, as compared to the permissible foreign ownership limit of 74% for any bank, indicating that the current foreign room is 17.56% (13/74%).

Foreign room of more than 15% generally results in an inflow, while less than 15% results in an outflow.

However, MSCI expects the foreign room to reduce due to increased demand from FPIs.

Due to this it has reduced the so-called foreign adjustment factor from 1% to 0.5%. This is usually done when the foreign room is expected to be low.

A change in MSCI’s methodology for determining weights resulted in investors who had accumulated stocks before the merger, fearing outflows instead of the expected $2.5-3 billion inflows, which would have resulted in substantial post-merger gains. Happened. ,

While HDFC is currently a part of the MSCI India Index, the designated bank is not. Once the entities are merged, Vishal will become part of the MSCI India index.

“HDFC currently has a weight of 6.74% in the MSCI India index and as per our preliminary calculations the weight of the merged entity will be slightly lower at around 6.5%,” said Abhilash Pagaria, Head of Alternative & Quant Research at Nuwama Wealth. The foreign exposure for the merged entity is around 18% which is above 15% and above the MSCI limit for maintaining stocks with full factor.

“However, as per the current methodology, the weighting of the merged entity would again be reduced in the next quarter’s index review if the foreign room falls below 15%.”

Pagaria expects the shares to face higher volatility in the short term.

MSCI periodically reviews the eligible universe of stocks that make up its index.

“Bank Nifty bears took control and the index broke the support of 43,000-42,800 zone and fell over 2%,” said Kunal Shah, Senior Technical & Derivatives Analyst, LKP Securities. “If the index sustains below 43000, it could see a further correction towards 42,500-42,300 zone where the next demand area is visible. If the upper resistance of 43,000 is decisively removed then a move to 43,300 levels can be seen.” And there will be short covering.