The National Stock Exchange may exclude Housing Development Finance Corporation (HDFC) from the NSE Nifty 50 index in the next few weeks as the HDFC and HDFC Bank merger looks likely to be completed a few months earlier than expected, according to analysts. Adhesive maker Pidilite Industries is among the front-runners to replace HDFC in the 50-share index. “The (HDFC) stock could be then excluded from all of the Nifty Indices earliest by end of December 2022 or max by middle of January 2023,” said Abhilash Pagaria, head of alternative and quantitative research at Nuvama Wealth Management. The housing finance company with a 5.5% weight in the Nifty could see an outflow of around $1.3-1.5 billion from the passive funds once it’s excluded from the benchmark.
This will be an ad hoc inclusion on account of the mortgage lender’s expulsion from the index on account of its merger with HDFC Bank, which has entered final stages. The shareholders’ meeting to approve the proposed merger of HDFC with HDFC Bank has been scheduled for 25 November. Nifty Indices Methodology book states, “In case of a merger, spin-off, capital restructuring or voluntary delisting, equity shareholders’ approval is considered as a trigger to initiate the replacement of such stock from the index through additional index reconstitution.”
As the weights of the indices are calculated based on free-float market capitalisation, the exclusion of HDFC will lead to a redistribution of most weightages in the top-10 Nifty heavyweights. According to Nuvama, HDFC’s stock could see outflows worth more than $1.5 billion because of exiting the benchmark indices, which could also have a bearing on the stock performance of HDFC Bank. Aside from Pidilite, Ambuja Cements (ACEM), Tata Power (TPWR) and SRF (SRF) are among the front-runners to replace HDFC in Nifty 50. Pagaria said that HDFC’s large 5.5% weight in the Nifty 50 index means that the stock could see heavy selling from passive funds that closely track the benchmark index.
Currently, over 22 ETFs track the Nifty 50 index as the benchmark with cumulative assets under management (AUM) of $30 billion (Rs 2.4 lakh crore). It is worth noting that HDFC’s shareholders are set to receive 42 shares of HDFC Bank for every 25 shares of HDFC held by them. Given the swap ratio, a sharp decline in shares of HDFC in the run-up to the exit from the Nifty indices is likely to trigger a sell-off in HDFC Bank. In the Nuvama note, Pagaria dismissed concerns among some market participants over HDFC Bank being excluded from the NSE indices after the merger. “In fact, once the merged company starts trading with a higher free float market capitalization, HDFC Bank will see an increase in weightage,” he said.