HDFC-HDFC Bank merger may pave way for Adani Enterprises' Sensex inclusion

LTIMindtree may get added to Nifty; merged HDFC Bank may see $4.9 bn inflows from passive tracker

Adani Enterprises (AEL), the flagship firm of the trouble-hit Gautam Adani Group, could make it to the benchmark S&P BSE Sensex as the impending merger between HDFC Bank and Housing Development Finance Corporation Ltd (HDFC Ltd) will open up one spot in the 30-share index. At present, no Adani Group stock is part of the Sensex, while AEL, along with Adani Ports and Special Economic Zone, is part of the Nifty50 index. 

Meanwhile, LTIMindtree fills the space created by the HDFC Bank-HDFC Ltd merger in the Nifty50 Index. 

Last week, the Reserve Bank of India provided forbearance and clarification sought by HDFC Group. With most regulatory approvals in place, the merger between the two financial sector behemoths is now expected to get completed in the next few months.

The changes to the National Stock Exchange Nifty and the Sensex on account of the merger will have implications in terms of passive investment flows.

“The highest ranked non-constituent is AEL, followed by JSW Steel. Both sectors are underweighted in the Sensex, compared to the S&P BSE AllCap Index. Ranked higher, we expect AEL to be added to the Sensex, where passive trackers will need to buy 5.09 million shares (worth Rs 940 crore). Given the sensitivity around Adani Group stocks, there is a non-negligible possibility that JSW Steel is added to the index. In that case, passive trackers will need to buy 17.83 million shares (worth Rs 1,293 crore) of JSW Steel,” says Brian Freitas, a New Zealand-based analyst with Periscope Analytics who has researched Adani Group.

AEL was on course to get added to the Sensex earlier this year. However, the sharp sell-off in the counter, following the report by US-based short-seller Hindenburg Research on January 24, marred its chances.

While inclusion in the Sensex may not lead to huge passive flows, it can give Adani Group a leg-up, given it is looking to restore investor confidence undermined by Hindenburg allegations. 

Freitas expects inflows of Rs 1,276 crore into LTIMindtree if it gets added to the Nifty50 Index.

Meanwhile, the spot left vacant by LTIMindtree in the Nifty Next 50 Index could get filled by Jindal Steel & Power, resulting in the buying of Rs 255 crore by passive trackers.

The bigger implication in terms of flows will be on the merged HDFC Bank and HDFC Ltd on account of changes in the Morgan Stanley Capital International (MSCI) Index.

At present, only HDFC Ltd is part of the MSCI India Index. Despite being a larger entity in terms of market value, HDFC Bank is not part of the global index due to limited investment legroom for foreign portfolio investors (FPIs).

However, the merged entity will have enough investment wiggle room for FPIs to become a member of the MSCI India Index.

At the end of the January-March quarter of 2022-23, the foreign room in the merged entity was seen 18 per cent higher than the 15 per cent threshold set by MSCI.

“Given the increase in the number of shares outstanding, following the merger and using a foreign inclusion factor of 74 per cent for the merged entity, passive MSCI trackers will need to buy 209.6 million shares (worth $4.9 billion) of HDFC Bank at the time of merger implementation,” says Freitas.