HDFC Bank's prospects for MSCI, FTSE light up as overseas holdings dip

If FPI holdings decline further in the two firms, it could lead to good buying opportunities: Analysts.

The entity created by the merger of Housing Development Finance Corp (HDFC) and HDFC Bank could make it to global indices MSCI and FTSE as overseas holdings in the two Indian firms have shrunk this year.

HDFC and HDFC Bank, in a surprise mid-quarter disclosure on May 13, said the total foreign portfolio investor (FPI) shareholding stood at 68.56 per cent and 66.55 per cent. This is down from 70.08 per cent in case of HDFC Bank and from 72.16 per cent in case of HDFC, during the start of the year.

“Both HDFC and HDFC Bank have filed their FII shareholding mid-quarter, which is very surprising considering shareholding is filed only quarterly by the companies. When we work the numbers, we can reason why--finally with this shareholding, HDFC merged entity will stay in MSCI and not get deleted”, said Suresh Ganapathy, Associate Director, Macquarie Capital.

“This removes an overhang on the stock, though the reality remains that foreign institutional investors will be significantly overweight HDFC group companies since the merged entity’s weight will be almost similar to HDFC’s weight in MSCI India”, he said.

HDFC is part of the MSCI and FTSE indices. HDFC Bank is not part as the investment legroom is below the minimum threshold set by MSCI and FTSE.

When HDFC and HDFC Bank announced their merger in April,, analysts had said the entity will not make it to the global indices. This was because foreign investment legroom in the merged entity was pegged at around 10 per cent—less than the required threshold of 15 per cent and 20 per cent set by MSCI and FTSE, respectively.

“Assuming the foreign room for the merged entity remains above 15 per cent (it is 16.04 per cent as of 13 May), the merged entity will be a member of the MSCI India Index. We estimate passive MSCI trackers already hold 129 million shares of HDFC. That will convert to 216.6 million shares of HDFC Bank. Given the increase in the number of shares outstanding following the merger and using a FIF (foreign inclusion factor) of 74 per cent for the merged entity (since the foreign ownership limit will be 74 per cent), passive MSCI trackers will need to buy 195.5 million shares ($3.83 billion) of HDFC Bank,” said analyst Provider Brian Freitas of Periscope Analytics who publishes on Smartkarma.

Freitas said that if the foreign room for the merged entity is higher than 20 per cent at the time of the merger implementation, passive FTSE trackers are estimated to buy 89.81 million shares ($1.76 billion) of HDFC Bank.

Shares of HDFC and HDFC Bank declined 1.4 per cent each on Monday, underperforming the Sensex which was little changed.

The proposed merger between the two financial giants is expected to complete either during the December 2023 or March 2024 quarter.

Analysts say if FPI holdings decline further in the two firms, it could lead to good buying opportunities as it will further cement the changes of inclusion in the MSCI and FTSE indices.