The mother of all mergers in the Indian corporate history will result in the creation of a a financial behemoth with a $169-billion market capitalisation (the second-largest in India) and among the 10 most valued banks in the world.

The merged entity of HDFC and HDFC Bank, analysts observed, will boast of a weight of nearly 15% in the Nifty50. This compares with Reliance Industries’ weight of 11.3%, Bloomberg data showed. 

On Monday, HDFC Bank announced a merger with HDFC Ltd, in the ratio of 1.68 shares of HDFC Bank for every one share of HDFC, in line with Friday’s closing prices. While the public owns the entire equity of HDFC, the promoter group held 21.01% in HDFC Bank as of December 2021, and this would be fully extinguished. Post the deal, HDFC’s shareholders would own 41% in the combined entity.

MORE HEADROOM FOR FPIS

Post the merger, foreign portfolio investors (FPIs) will have the headroom to raise their holding in HDFC Bank by another 7%. The merged entity will also become a candidate for inclusion in MSCI Index, say analysts.

Analysts at Maquarie wrote on Monday the FPI shareholding in HDFC Bank, post the merger, will be approximately 66% compared with the cap of 74%. Thus, there is an enhanced gap of 7-8% versus the room of around 4% currently for FPIs to hold the stock. However, they believe the inclusion of the merged HDFC Bank in the index may be difficult, as MSCI India requires a bigger FPI headroom, from the cap, for inclusion.

“Foreign portfolio investors will get headroom to raise their holding in HDFC Bank by 7%, Keki Mistry, CEO of HDFC, said in an investor call. As of December 2012, HDFC had the highest FPI holdings among the Nifty constituents. While foreign investors held 72.14% in HDFC, their holding in HDFC Bank stood at 30.52%.

Analysts are of the opinion that, the combined entity will be able to extract substantial synergy benefits which bode well for all stakeholders and shareholder and the reduction of shares would be EPS accretive for the first year itself.

As per the merger deal, shareholder of HDFC will get 42 shares of HDFC Bank for every 25 shares held by them, as on record date. After rallying as much as 16.4%, in intra-day trade, the stock of HDFC settled at 2,680.05 on the NSE, up 9.3%.  Shares of HDFC Bank advanced 10% to end the day at 1,656.80. Other group stocks like, HDFC Asset Management and HDFC Life Insurance also rose 3.5%, and 3.90%, respectively on Monday.

“HDFC Bank will get an unparalleled advantage as the bank was not growing the mortgage book because of the conflict of interest with the parent, at the same time, the housing loan books of ICICI Bank and other smaller PSBs were growing substantially over the last few years,” A.K. Prabhakar, Head of Research at IDBI Capital Markets & Securities. The deal would also enable the combined entities to boost their market share as they can expand footprint into semi-urban and rural areas, added Prabhakar. The combined entity will have a total loan book of Rs 17.85 trillion. The loan book of the largest lender –State Bank of India — stood at Rs 25.78 trillion at the end of December.