Explainer: How HDFC-HDFC Bank Merger Will Impact Stock Markets

HDFC Bank shares continued their rally after hitting fresh lifetime highs on Monday after the merger with Housing Development Finance Corporation (HDFC) Limited sought to create the world’s fourth-largest bank by market valuation.

On Tuesday, the HDFC Bank shares ended 0.30 per cent higher at Rs 1,725 after recording a lifetime high of Rs 1,757.50 and settling 1 per cent higher at Rs 1,721. Shares of HDFC Limited ended 0.46 per cent higher at Rs 2,884.50. 

The reversed merger of HDFC Ltd with its subsidiary HDFC Bank is termed the biggest transaction in the history of India Inc. The HDFC Bank-HDFC Ltd merger is effective on 1 July. The Boards of both companies announced the effective date after their respective meetings held on 30 June. 

The Housing Development Finance Corporation will be delisted from the stock exchanges and 13 July has been fixed to be the record date. The shareholders of HDFC Ltd shall be issued and allotted the shares of HDFC Bank on 13 July. The merger was announced on 4 April 2022. The process is likely to be completed in around 15 months. 

Impact Of HDFC Merger On The Stock Market:

According to Santosh Meena, Head of Research at Swastika Investmart Ltd, the HDFC merger is having a positive impact on the stock market. The HDFC twins were underperforming for a long time due to regulatory hurdles. However, as the market got clarity about the merger, both stocks started to rally. This is because the merger will create a financial services behemoth with a combined asset base of around ₹18 lakh crore.

“The merged entity will also have a high weightage in Nifty, which is why we are seeing strong bullish momentum in the index. Moreover, the appreciation of this merger extends beyond the market sentiment, as it is also being recognized and appreciated by investors on a fundamental level,” he said.

The merger will lead to around 54 per cent surge in the market capitalization of HDFC Bank. In the Nifty Index, the relative weight of the merged entity would be around 15 per cent. Currently, HDFC Bank contributes 9.23 per cent and HDFC contribute 6.66 per cent in Nifty, combined they contribute 15.39 per cent in Nifty.

The merger brings about several advantages, such as improved operational efficiency, synergies, and a stronger financial position, which are highly valued by investors who recognize the potential for enhanced profitability and long-term growth resulting from the merger, Meena added.

“HDFC Bank has been underperforming the Nifty for the last 3 years despite its decent growth. This underperformance is likely to change post-merger. The bank which has an enviable track record and excellent execution capabilities will gain from the synergy unleashed by the merger. Presently, HDFC Bank is trading at 13.5 times earnings, which is a discount to the 5-year average PE (Price to earnings ratio) of 20. From the Price to Book perspective also the stock is trading at 2.2 times vs the 5-year average PB of 3.5,” said Dr VK Vijayakumar, Chief Investment Strategiest at Geojit Financial Services.

“Institutional selling to comply with the 10% holding ceiling has been weighing on the stock. This will be over once the merger is affected,” Vijayakumar said, adding that the prospects of the merged entity look very bright. 

The merger will attract more institutional investment from sector-specific funds and ETFs which are not bound by a 10 per cent ceiling, he said. 

HDFC Bank-HDFC merged entity will become the second most valuable company in India in terms of market share. As of June 30, HDFC Bank's market value stood around Rs 9,51,584.36 crore and HDFC's capitalization was at Rs 5,22,368.64 crore. The merged entity’s market cap would be Rs 14,73,953 crore, which will be higher than TCS, which at present is the second largest company with a market cap of Rs 12.11 lakh crore.