HDFC-HDFC Bank merger could set off Rs 48k-cr Nifty50 churn: Brokerage

Market players seek clarity from exchanges on the exclusion rule

The imminent merger between Housing Development Finance Corporation (HDFC) and HDFC Bank could lead to a churn of nearly Rs 48,000 crore in the benchmark Nifty50 index. Currently, both the financial sector behemoths have considerable weightage in the 50-share index.

Closer to their effective merger date, both HDFC and HDFC Bank will be removed from the Nifty, say strategists at ICICI Securities, citing a rule around index computation methodology. The rule says any entity which undergoes a scheme of merger gets excluded from the index. In 2016, Grasim was removed from the Nifty index ahead of its merger with Aditya Birla Nuvo (ABNL). More recently, NMDC was removed from the Nifty CPSE index due to a de-merger scheme.

“The HDFC merger will likely result in an unprecedented 14 per cent of the Nifty 50 weight (HDFC plus HDFC Bank) getting replaced by two new incoming stocks with a combined weight of 1 per cent. The remaining 13 per cent weight getting distributed amongst the existing 48 stocks in the index at that time. The HDFC merger-related index changes can potentially result in buying and selling of stocks worth above Rs 48,000 crore based on July end-prices,” said Vinod Karki and Niraj Karnani, equity strategists at ICICI Securities in a note.

Karki said if index providers make a special exemption in case of HDFC, then the churn theory will not hold. If not, then it will be a large boost for other Nifty50 components as HDFC twins’ weightage will get distributed among them.

Exchange traded funds (ETFs) and index funds with assets under management (AUM) of over Rs 1.7 trillion track the Nifty50 index. If one adds the AUM of ETFs tracking the Sensex index, the churn could be even more. ETFs with an estimated AUM of Rs 88,000 crore track the 30-share Sensex.

To be sure, the stocks that were previously removed had far less weightage than the HDFC twins. It has never happened that a stock with such a large weightage has got removed from the index.

Analysts at other brokerages tracking index changes said it is a wrong interpretation that both HDFC and HDFC Bank will get removed from the index. They said the resultant/merged entity will remain in the index, with a significantly higher weightage. As a result, the question of weightage distribution to other Nifty components won’t arise.

A few analysts said they have sought clarity from the exchange on the applicability of the rule around exclusion due to merger.