Amalgamation-bound HDFC twins soar more than 5% each on MSCI tweak

Shares of HDFC Bank and parent Housing Development Finance Corp (HDFC) jumped more than 5 per cent each on optimism that their amalgamation will attract higher capital flows from passive trackers than previously anticipated.

The optimism follows a rule tweak by global index provider MSCI on treatment of stocks M&A-bound in its indices. M&A stands for merger and acquisition.

“MSCI has come up with new rules on how to handle corporate events like M&A and that will remove the technical overhang of HDFC Bank. What these new rules imply is that HDFC Bank will be considered as an extension of HDFC post the merger and the foreign headroom requirement will be that of an existing constituent. The net impact will be that the weight of HDFC merged entity in MSCI could be double the weight of HDFC in MSCI currently,” said Anjali Sinha, Head of India Equity Sales at Macquarie in a note, which was widely-circulated.

Shares of HDFC rose 5.84 per cent to close at Rs 2,651, while that of HDFC Bank soared 5.62 per cent to finish at Rs 1,611. Both stocks were the biggest gainers in both the Sensex and Nifty indices and accounted for nearly half of the gains made by these indices.

In another note, Abhilash Pagaria of Nuvama Alternative & Quantitative Research said the weightage of HDFC and HDFC Bank combined in MSCI will increase to 12 per cent from just 5.73 per cent at represent, which will result in additional flows of $2-2.5 billion.

Currently, the so-called LIF in case of HDFC is only 0.5, which means only half of its free-float market cap of the stock is considered for index inclusion. This weighs on its weightage in the index. A LIF of 1 will increase its free float market cap and therefore its weightage.

Interestingly, MSCI had communicated the new methodology in October itself and only made minor tweaks to its statement.

“HDFC and HDFC Bank up big today due to a slight wording change in the methodology…. This does not change anything for us. We had expected the stock to be added with a LIF (Limited Investability Factor) of 1 and this was our conclusion which still holds,” said analyst Brian Freitas of Periscope Analytics who publishes on Smartkarma.

In a note dated October 19, Freitas had said passive MSCI trackers will need to buy 210.38 million shares (worth $4.27 billion) of the merged entity.