With the reverse merger of HDFC twins making HDFC Bank stock much more muscular, India's largest private sector lender will now command more weightage in Nifty than billionaire Mukesh Ambani's Reliance Industries (RIL).
With effect from July 13, when HDFC shares stop trading on stock exchanges following a reverse merger with its banking unit, the weightage of HDFC Bank will increase to 14.43%. At present, RIL controls 10.9% of Nifty which will get reduced to 10.8%.
The changes will make HDFC Bank command the highest weightage in the index and give it more fire power to dictate the direction of India's heartbeat index.
In case of Nifty Bank index, HDFC Bank's weight will increase from 26.9% to 29.1%, leading to inflows of about $70 million from passive funds, according to calculations by Nuvama.
ICICI Bank will see its weight reducing from 24.4% to 23.3%. India's two largest private sector lenders ICICI Bank and HDFC Bank will together command 52.4% of weightage in Nifty Bank.
SBI, Kotak Mahindra Bank and Axis Bank would also suffer weight reduction in the banking index.
In case of Nifty50 the weightage of ICICI Bank, Infosys, ITC and TCS would also be reduced. India's sixth largest IT company LTIMindtree will take HDFC's seat in Nifty.
HDFC Bank vs RIL
At a market capitalisation of around Rs 18.5 lakh crore on Monday's closing price, RIL is India's largest company by market capitalisation while HDFC Bank is at No.3 slot with a market value of Rs 9.26 lakh crore.
Following the merger, HDFC Bank's market cap would also increase as HDFC shareholders would get 42 fully paid-up shares of HDFC Bank for every 25 held in HDFC.
Unlike RIL, HDFC Bank doesn't have a promoter and therefore the free float of the banking giant will turn out to be the highest amongst all listed stocks. NSE indices use free float market capitalization method to calculate the weightage. So stocks that have a higher free float also enjoy a higher weightage in the indices.
HDFC Bank had a very humble beginning on Dalal Street. When its IPO opened on 14 March 1995 at an issue price of Rs 10, the Rs 50 crore IPO was subscribed 53.31 times. Since then, it has seen a meteoric rise as one of the largest wealth creators in the annals of Dalal Street.
What should investors do?
HDFC Bank stock, which has been a favourite of many long-term investors and one of the largest wealth creators on Dalal Street, will not just become more powerful in Nifty after the merger but may also attract more bulls.
"The merger is synergistic. HDFC Bank gets access to secured and long tenor retail mortgage products as well as a large customer base. Its product suite – plus direct access to insurance and other subs – and geographical reach are superior to those of most private banks," said Morgan Stanley's Sumeet Kariwala.
The foreign brokerage has recently resumed coverage on the stock with an overweight rating and a target price of Rs 2,110.
The stock was trading at 16x one-year forward EPS, ~20% below the 15-year mean. Strong trailing investments and cyclical tailwinds (benign asset quality and improving real deposit rates) will help it navigate merger challenges better and return to 17-18% EPS growth after a year, Kariwala said, while describing HDFC Bank as a compounder available at attractive valuations.
In the last 3 months, the stock has given flat returns and ended Monday’s session at Rs 1,656.30 on BSE.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
