A mega merger benefitting all stakeholders is a rare event. The unprecedented proposed mega merger of HDFC with HDFC Bank is a win-win game-changing merger with potential profound beneficial consequences for all stakeholders.
The merger will unleash the synergies of the HDFC twins. HDFC will benefit from the low-cost funds of HDFC Bank and its large branch network. HDFC Bank will benefit from the competence of HDFC in mortgage finance. The proposed merger – 42 HDFC Bank shares for 25 HDFC shares – which will reduce HDFC Bank’s exposure to unsecured credit, is hugely value-accretive for shareholders of both companies.
The merger has come at a time when HDFC’s mortgage lending has recorded an impressive growth in FY22 and HDFC Bank has been mobilizing deposits and growing credit beating the industry growth. The fact that HDFC Bank has grown its market share by 3 percent during the last three years of poor credit growth is no mean achievement. But the stock prices of the HDFC twins remained depressed due to relentless FPI selling.
Investors gain substantially
The merger will correct the recent market underperformance of HDFC twins. The double- digit spike in the prices of HDFC twins – a rare event for large-caps – is an indication of the shape of things to come. Shorts in the twins, banking on expectations of further selling by FPIs, are getting squeezed.
The merged entity, the third largest company in India in market cap, will have the highest weightage in Nifty stocks.
Indian mutual funds gain and FPIs lose
The HDFC twins, particularly HDFC Bank, are among the most widely held stocks in India’s mutual funds. HDFC Bank is among the top five stocks of most large-cap funds. Investors in mutual funds, therefore, stand to gain from the spike in NAVs of the funds.
FPIs have been relentless sellers in the Indian market since since October 2020. Since financials, particularly banks constitute the largest segment of FPI holding, HDFC twins were sold by FPIs shortsightedly without regard for their fundamentals and earnings potential. DIIs and retail investors who absorbed all the FII selling in HDFC twins will be laughing all the way to the banks.
It was the FPI selling, and not their fundamentals, which kept the prices of HDFC twins depressed. HDFC Bank before the merger announcement was trading at forward Price to Book of 2.5. The stock used to trade at a Price to Book of more than 4.
Higher SLR and CRR will be only marginally negative
A negative factor from the earnings perspective is that the merged entity’s CRR and SLR requirements will go up since HDFC Ltd didn’t have these statutory commitments. But the sheer size of the merged entity and the high CASA of HDFC Bank can mitigate the impact of this higher burden.
Customers, financial sector and economy to benefit
The merged entity will become a financial behemoth and India will have a large global bank. Customers will have access to all financial products under one roof.
The economy will benefit from the merged entity’s ability to finance large infrastructure projects. The higher priority sector lending from the merged entity will benefit the agriculture sector. This mega merger has come at a time when the war, crude price hike and higher inflation have been emerging as clouds over the economic horizon. This is, indeed a sparkling silver cloud.
First published in Economic Times.