HDFC, HDFC Bank shares: Nuvama noted that MSCI intends to further review the adjustment factor of HDFC Bank at a scheduled index review following the completion of the transaction. 
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HDFC, HDFC Bank shares: Nuvama noted that MSCI intends to further review the adjustment factor of HDFC Bank at a scheduled index review following the completion of the transaction. Shares of HDFC Bank and Housing Development Finance Corporation Ltd plunged up to 6 per cent in Friday's trade amid a report suggesting the merged HDFC entity could see $150-200 million in outflows, as the index aggregator MSCI in an update to clients said it will use an adjustment factor of 0.50 to compute HDFC merged company weightage.
Following the development, shares of HDFC Bank plunged 5.56 per cent to hit a low of Rs 1,631 on BSE. Shares of HDFC declined 4.97 per cent to Rs 2,720. The market capitalisation of the two companies fell Rs 63,870 crore within first few minutes of trade.
HDFC is a part of a global index with a weight of 6.74 per cent. While HDFC Bank is not a part of the index, it was expected that the merged entity would be a part of this index. The Street was expecting the the combined entity to see net inflows of $3 billion on account of getting a full adjustment factor of 1x.
That said, as per the MSCI update, the adjustment factor stands at 0.5x. As a result, the combined entity would have a weight of 6.5 per cent in the index against the current weight of HDFC at 6.74 per cent. Therefore, the combined entity is expected to see marginal outflows.
Nuvama noted that HDFC Bank is subject to a Foreign Ownership Limit (FOL) of 74 per cent and has current foreign room below 15 per cent. Based on the latest available shareholding disclosure, the foreign room of the post-acquisition entity is expected to be marginally above 15 per cent, it said.
"Based on the estimated post-event foreign room of HDFC Bank and pursuant to the MSCI Corporate Events Methodology (Section 1), to reduce risk of reverse turnover, MSCI intends to add HDFC Bank to the Large Cap Segment of MSCI Global Standard Indexes with a FIF of 0.37 after applying an adjustment factor of 0.5. Thus leading to no incremental inflow but slight outflow ($150 to $200mn)," Nuvama noted.
Nuvama noted that MSCI intends to further review the adjustment factor of HDFC Bank at a scheduled index review following the completion of the transaction and in accordance with the section 3.1.6.2 of MSCI GIMI methodology.
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It noted that HDFC's current weight is 6.74 per cent in MSCI India Index and as per its preliminary calculations the merged entity would have slightly lower weight of about 6.5 per cent.
"We had estimated the foreign room for the merged entity to be around 18 per cent, which is above 15 per cent and above the MSCI threshold to maintain stock with full factor.
"However as per the current methodology the weighting of the merged entity would be again reduced in the next quarterly index reviews if the foreign room would have come below 15 per cent. To avoid excessive volatility , MSCI intends to add HDFC Bank to the Large Cap Segment of MSCI Global Standard Indexes with a FIF of 0.37 after applying an adjustment factor of 0.5,” it said.
MSCI will further review the adjustment factor of HDFC Bank at a scheduled index review following the completion of the transaction and in accordance with the section 3.1.6.2 of MSCI GIMI methodology.
:With index inclusion and clarity on RBI’s merger dispensations, we expect the focus will be back to fundamentals. The HDFC Bank stock trades at 17 times+ FY24CL PE, which we believe is fair for the 16-17 per cent growth trajectory that the merged entity could have over the next five years. ICICI trades at 14.1x (15% lower valuation) and remains our top sector pick," CLSA said.
Nuvama said in its previous update on April 13, it had laid out two key scenarios – Scenario 1) If the foreign room remained above 15 per cent the weight would had doubled in the index leading to incremental inflow of $3 billion and scenario 2 where MSCI would change the methodology to avoid excessive volatility. "Thus MSCI has gone ahead with reducing excessive volatility and changing the methodology," it noted.
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