HDFC – HDFC Bank merger may result in Rs 48000 crore fund flows, see 14% of index weight re-adjusted

Merger of HDFC Bank with Housing Development Finance Corporation (HDFC) could turn out to be a major event for the benchmark NSE Nifty 50 index, which currently consists of both the stocks. According to analysts at ICICI Securities, the proposed merger, once in place, will likely result in an unprecedented ~14% of the Nifty 50 weight getting readjusted. This would likely result in close to Rs 48,000 crore worth of buying and selling based on July 2022 prices, analysts said. HDFC and HDFC Bank have secured a few approvals for their merger, which was announced in April this year, including that of the Reserve Bank of India (RBI) and the stock exchanges.

What could HDFC-HDFC Bank merger entail for Nifty 50

“The HDFC merger will likely result in an unprecedented ~14% of the Nifty 50 weight (HDFC Ltd plus HDFC Bank) getting replaced by two new incoming stocks with a combined weight of ~1% and the remaining 13% weight getting distributed amongst the existing 48 stocks in the index at that time,” ICICI Securities said. As of July 29, HDFC Bank has a weight of 8.36% in the Nifty 50 index, second only to Reliance Industries. HDFC has a weight of 5.72%. 

In terms of fund flows, ICICI Securities projects buying and selling worth Rs 48,000 crore as an aftermath of the merger of the two financial stocks. “On the basis of current NIFTY50 ETF AUM of (Rs 1.7 lakh crore), the HDFC merger-related index changes can potentially result in buying and selling of stocks worth above (Rs 48,000 crore) based on Jul’22 end-prices,” they said. Further, Sensex ETFs have another Rs 88,000 crore AUM and could see a similar action to the Nifty 50. Any change in the index could be announced and finalised in less than one month from the date of shareholders’ approval, according to ICICI Securities which has sighted Grasim’s corporate restructuring as an example for the same. Grasim shareholders approved the corporate restructuring on April 6, 2017, and on April 27, 2017, the exclusion announcement of Grasim from Nifty with effect from May 25, 2017, was announced.

Adani Enterprises likely to enter index

While no timeline can be pinned on the HDFC and HDFC Bank merger and the subsequent index adjustment, ICICI Securities believes the upcoming index re-shuffle is likely to see Adani Enterprises enter the benchmark index. “The regular, semi-annual change will likely see Adani Enterprises entering and Shree Cement exiting the NIFTY50 index,” they added. The changes are expected to be announced this month and will come into effect from the last trading day of September. 

Also Read: Adani Enterprises stock may replace Shree Cements in Nifty 50 in next review; check other possible changes

The entry of Adani Enterprises is likely to result in Rs 2,400 crore worth of buying and selling from ETFs. “This change will result in buying worth (Rs 17,600 crore) (5x ADTO) for Adani Enterprises and selling worth (Rs 6,300 crore) (6x ADTO) for Shree Cement from Nifty 50 ETF funds,” analysts said. The rejig in the index will also result in a fall in the ‘Look-through earnings’ of the index as Shree Cement’s free float earnings for FY22 stand at Rs 800 crore or 4x that of Adani Enterprises’ FF earnings for FY22. Further, FY22 P/E of the NIFTY50 index will increase by 0.9% to 24.3x and FY22 RoE of the NIFTY50 index will dip marginally by 3bps to 14.69%.