HDFC may bow out of Nifty 50 by January, trigger $1.5 billion in outflows

As the impending merger of Housing Development Finance Corporation and HDFC Bank edges closer, traders are itching to place bets on HDFC’s exit from the benchmark Nifty 50 index.

HDFC Bank following its September quarter earnings on October 15 said that the timeline for the merger has been advanced to the first quarter of 2023-24 from the second quarter of the same financial year.

As per previous precedent, index setters at the National Stock Exchange and BSE tend to make a decision on the exclusion of a stock undergoing merger, takeover or demerger following the date of the shareholders’ meeting.

In HDFC’s case, the shareholders’ meeting to approve the proposed merger with HDFC Bank has been scheduled for November 25.

“The stock could be then excluded from all of the Nifty Indices earliest by end of December 2022 or max by middle of January 2023,” said Abhilash Pagaria, head of alternative and quantitative research at Nuvama Wealth Management.

Pagaria said that HDFC’s large 5.5 percent weight in the Nifty 50 index means that the stock could see heavy selling from passive funds that closely track the benchmark index. Currently, more than 22 ETFs track the Nifty 50 index as their benchmark with a cumulative assets under management of more than Rs 2 lakh crore.

As per Nuvama, HDFC’s stock could see outflows worth more than $1.5 billion because of exiting the benchmark indices, which could also have a bearing on the stock performance of HDFC Bank.

HDFC’s shareholders are set to receive 42 shares of HDFC Bank for every 25 shares of the non-bank lender held by them. Given the swap ratio, a sharp decline in shares of HDFC in the run-up to the exit from the Nifty indices could also trigger a sell-off in HDFC Bank.

Dealers with knowledge of the matter said that traders will start building up short positions in HDFC once NSE announces the exit of the stock from its indices. That said, Pagaria dismissed concerns among some market participants over HDFC Bank being excluded from the NSE indices after the merger.

In the past, NSE has never excluded companies that make acquisition as reflected in recent examples of Shriram Transport Finance and Tata Steel.

“In fact once the merged company starts trading with a higher free-float market capitalisation, HDFC Bank will see an increase in weightage (in the Nifty 50),” Pagaria said.

In terms of stocks that may replace HDFC in the Nifty 50 index, Pagaria believes Pidilite Industries, Ambuja Cements and Tata Power will be the front-runners based on current criteria of the NSE.

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