HDFC, HDFC Bank shares on a roll! Here's what experts say

Shares of HDFC and HDFC Bank were on a roll in early trade on Monday after the boards of mortgage player and the largest private sector bank approved the merger in the respective meetings.

HDFC share price zoomed 15 per cent to hit an intraday high of Rs 2855.35 on BSE. With a market capitalisation of more than Rs 4,83,000 crore, the shares stand higher than 5 day, 20 day, 50 day, 100 day and 200 day moving averages.

Likewise, HDFC Bank stock jumped over 14 per cent to hit an intraday high of Rs 1721.85 on BSE. Market capitalisation of the private lender breached Rs 9,00,000 crore mark.

The combined market cap also surpassed that of TCS, the country’s second-largest company in terms of market capitalisation, after Reliance Industries.

Abhay Agarwal, Founder, and Fund Manager, Piper Serica noted that the timing of the merger has caught everyone by surprise but the merger by itself is not surprising. With a tightening of the regulatory environment especially with regards to the NPA recognition norms of the high-margin builder-lending book of HDFC and increased competition from public sector banks and new-age fintech companies, it is not entirely a merger of choice.

He highlighted that the merger will be more beneficial to HDFC Ltd. since it has a lower profitable business and with HDFC Bank it can increase its product penetration. However, the business-related synergies could have been driven without the merger also.

"The bet by the management is clear that the increased balance sheet size of the entity will enable it to increase its competitiveness and create shareholder value. We can see some cost synergies through this merger however it is difficult to see how the merger will by itself help the merged entity increase its market share. HDFC Bank has been beset by the woes of its digital initiatives and many parts of its retail banking are under pressure from fintech companies," he added.

"While the markets have given a euphoric reaction to this news, we believe that the earnings of HDFC Bank could be downgraded in the near term and the onus will be on the management to prove the upside of the merger through operating performance," he said.

Kranthi Bathini, equity strategist at WealthMills Securities also said that it's a positive move to unlock the synergies between two monolith group entities to create a much bigger financial entity.

"This merger will help expand the customer base and build a product portfolio in the housing loan category. We expect a great future ahead for this giant and this merger might be a game-changer in their segment. We recommend buying this stock and accumulating it on dips," Manoj Dalmia-Founder and Director-Proficient Equities Limited told Business Today.

Dr. Ravi Singh-Vice President and Head of Research, ShareIndia highlighted that HDFC Bank reported loan growth of 21 per cent year on year and retail deposit growth is healthy. The operating profits may also see a surge on strong commercial banking and corporate segment. The merger of HDFC Bank and HDFC is a complement to the investors and a value addition to HDFC Bank.

According to VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, the merger of HDFC with HDFC Bank is an unprecedented mega-merger that will benefit all stakeholders. The shareholders of both entities stand to benefit substantially as already reflected by the sharp up moves in their stock prices.

For shareholders, he said that this is far better than a buyback at higher prices. This mega-merger will correct the recent underperformance of the HDFC twins. The stock prices of HDFC twins are likely to remain firm even after this morning's sharp spike.

From the valuation perspective, he noted that the HDFC twins are even now only attractively priced in a highly valued market. FPI's strategy of sustained selling in HDFC twins has been proved to be a short-sighted decision.

"The combined entity will have advances of Rs. 17.87tn on a pro forma basis as of 31st Dec’21 and will lead to an increase in mortgage to 33% from current levels of 11% for HDFC Bank," said Jyoti Roy, DVP- Equity Strategist, Angel One Ltd.

"The deal is EPS and BV accretive by 4% and 8% respectively for HDFC Bank on a pro forma basis and is therefore value accretive for existing shareholders of HDFC bank. We currently have a BUY rating on HDFC Bank with a target of Rs. 1,859 and will review our target post the development," Roy added.