Merged HDFC Bank set to push Reliance off its perch as top weight

With Housing Development Finance Corporation’s (HDFC’s) merger with HDFC Bank becoming effective on July 1, the merged entity is set to become the top weight in the benchmarks S&P BSE Sensex and the National Stock Exchange Nifty indices, dislodging the country’s most valuable company, Reliance Industries (RIL), from its perch. HDFC will stop trading after July 13.

At present, RIL has a weighting of close to 12 per cent in the Sensex and 10.3 per cent in the broad-based Nifty. Meanwhile, HDFC Bank and HDFC have weights of 9.9 per cent and 6.8 per cent in the Sensex and 8.8 per cent and 6 per cent in the Nifty, respectively.

On a pro-forma basis, the merged entity will have a weight of 16.7 per cent and 14.8 per cent in the Sensex and the Nifty, respectively.

However, the merged HDFC Bank’s market capitalisation (m-cap) of Rs 14.7 trillion is likely to stay below RIL’s, which is valued at Rs 17.3 trillion, but will move past Tata Consultancy Services (TCS), currently valued at Rs 12.1 trillion.

Both RIL’s and TCS’ free-float m-caps are lower compared to HDFC Bank’s. Hence, the private sector lender will command a much higher weighting. The merger will also stir up changes in popular indices such as the Nifty, Sensex, and Bank Nifty.

“After the merger, we estimate passive trackers to own about 11 per cent of the company, American depository receipt holders to own 13.7 per cent, retail and high networth investors to own 10.5 per cent, insurance companies to own 8.25 per cent, and about 55 per cent held by active investors,” says analyst Brian Freitas, a New Zealand-based analyst with Periscope Analytics.

LTIMindtree is expected to be added to the Nifty index. The information technology major could witness inflows of Rs 1,630 crore from passive trackers, estimates Freitas, who publishes on Smartkarma.

Meanwhile, LTIMindtree could be replaced by either Jindal Steel & Power or TVS Motor in the Nifty Next 50 Index.

Further, JSW Steel could get added to the Sensex, which could result in a passive buying of nearly Rs 1,400 crore.

While there won’t be any immediate changes to the Bank Nifty Index, the weight of the merged entity, however, will be capped, resulting in a churn of Rs 2,367 crore at the time of the merger implementation, observes Freitas.

There will be selling in the merged HDFC Bank by active mutual fund schemes worth Rs 5,000 crore to adhere to the 10 per cent cap on single stock exposure.

Global index trackers will also have to sell HDFC on its last trading day, say analysts. However, the money will once again flow back into the merged entity.

Index providers, such as Morgan Stanley Capital International and Financial Times Stock Exchange, are expected to announce the merger treatment and index replacements this week. These will be keenly watched by the market.

The merged entity is also set to alter the global banking league table.

With an m-cap of nearly $180 billion, the new HDFC Bank will become the second-most valuable bank in the Asia-Pacific region after the Industrial and Commercial Bank of China (ICBC), which is valued at $228 billion. It will also be the fourth-most valuable bank in the world after JPMorgan Chase ($416 billion), ICBC, and Bank of America ($227 billion).