- Shares of HDFC Bank and Housing Development Finance Corporation Ltd plunged due to MSCI assigning a lower weight for the merged entity, resulting in marginal outflows.
- The adjustment factor of 0.5x led to the combined entity having a weight of 6.5% in the index, causing the market capitalization of the two companies to fall by Rs 63,870 crore.
- MSCI will review the adjustment factor of HDFC Bank at a scheduled index review following the completion of the transaction, and ICICI remains the top sector pick according to CLSA.
In Friday's trading session, shares of HDFC Bank and Housing Development Finance Corporation Ltd (HDFC) plummeted by up to 6% due to an MSCI update suggesting that the merged HDFC entity could see $150-200 million in outflows. This is because MSCI will use an adjustment factor of 0.50 to compute the HDFC merged company weightage.
HDFC is a part of a global index with a weight of 6.74%, while HDFC Bank is not a part of the index. It was expected that the merged entity would be a part of this index, and the market was anticipating the combined entity to see net inflows of $3 billion. However, as per the MSCI update, the adjustment factor stands at 0.5x. Therefore, the combined entity would have a weight of 6.5% in the index against the current weight of HDFC at 6.74%. Consequently, the combined entity is expected to see marginal outflows, leading to a fall in market capitalisation of the two companies by Rs 63,870 crore in the first few minutes of trade.
Nuvama noted that HDFC Bank is subject to a Foreign Ownership Limit (FOL) of 74%, and its current foreign room is below 15%. However, based on the latest available shareholding disclosure, the foreign room of the post-acquisition entity is expected to be marginally above 15%. “Based on the estimated post-event foreign room of HDFC Bank and pursuant to the MSCI Corporate Events Methodology (Section 1), to reduce the risk of reverse turnover, MSCI intends to add HDFC Bank to the Large Cap Segment of MSCI Global Standard Indexes with a FIF of 0.37 after applying an adjustment factor of 0.5. Thus leading to no incremental inflow but slight outflow ($150 to $200mn),” Nuvama noted.
MSCI will further review the adjustment factor of HDFC Bank at a scheduled index review following the completion of the transaction and in accordance with the section 22.214.171.124 of MSCI GIMI methodology.
Despite the setback, market experts believe that the focus will soon be back to fundamentals. The HDFC Bank stock trades at 17 times+ FY24CL PE, which is believed to be fair for the 16-17% growth trajectory that the merged entity could have over the next five years. ICICI trades at 14.1x (15% lower valuation) and remains the top sector pick, according to CLSA.