HDFC twins' merger is win-win for shareholders; here's why

Following the announcement of the merger of HDFC with HDFC Bank, shares of both the financial majors surged up to 16 per cent in Monday's trade. Analysts on Dalal Street gave a thumbs up to the announcement. They believe that the merged entity will gain from the cross-selling opportunities and synergies.

In regulatory filings, the HDFC twins said that once the scheme is in place, the subsidiaries and associates of HDFC will become subsidiaries and associates of HDFC Bank. Shareholders of HDFC on the record date will receive 42 shares of HDFC Bank, for 25 shares held in HDFC Limited.

Commenting on the announcement, Ajit Kabi, banking analyst, LKP Securities said, "The amalgamation between HDFC Bank and HDFC is a fruitful deal for both the parties. The merger is subjected to regulatory approvals and is expected to be completed by Q3FY24. We expect the technological platform to be well synchronised and shall enable the bank to build a larger housing loan portfolio."

"The proportion of unsecured loans will be narrowed down and it will drag down the risk weight, hence improvement in the capital buffer. Despite the larger housing book, the net interest margins (NIMs) are likely to stay stable with the bank's aggressive approach to build a low-cost CASA deposit. The valuation is still attractive. We believe it's a win-win situation for both shareholders," he added.

It must be noted that foreign institutional investors (FIIs) held a significant stake in these entities. Overseas investors held a 37.47 per cent stake in HDFC Bank as of December 31. On the other hand, they had a 72.14 per cent stake in HDFC.

Shivaji Thapliyal, lead analyst-institutional equities, YES Securities said, "Since the shareholding of HDFC is regarded as an FII investment, the extinguishing would lead to opening up of around 7-8 per cent headroom for FII investors into HDFC Bank."

He further sees cross-selling opportunities from the merger. "About 70 per cent of HDFC Limited customers do not bank with HDFC Bank, indicating significant opportunity. About 80 per cent of HDFC Bank customers do not have mortgages, indicating low penetration. The friction that exists currently between sanction and disbursal will go away. There would also be opportunities to sell life insurance and non-life insurance products. There would be other synergies for the combined entity," Thapliyal said.

VK Vijayakumar, chief investment strategist, Geojit Financial Services added that 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, this is far better than a buyback at higher prices. This mega-merger will correct the recent underperformance of the HDFC twins," Vijayakumar said.

Shares of the HDFC Bank and HDFC declined 1.5 per cent and 4.4 per cent, respectively, in the financial year ended March 31, 2022, while the benchmark BSE Sensex surged 18.30 per cent during the same period.

From the valuation perspective, Vijayakumar believes that the HDFC twins are even now only attractively priced in a highly valued market. The merged entity will gain from the synergies of the merger.

"The mortgage business will gain from the low-cost funds of the bank and the bank will gain from HDFC's competence in mortgage lending. The Indian economy will benefit from larger investment by the merged entity in large infra projects. India will have a large global bank," he said.

Post-merger HDFC Limited will hold a 41 per cent stake in HDFC Bank. Of late, the private sector bank reported robust loan growth in Q4FY22, led by a healthy revival in retail loans. The commercial banking and corporate segment too saw strong traction, which will likely support growth in pre-provisioning operating profit (PPOP).

"We expect the margin trajectory to recover gradually over FY23, while the uptick in retail loan growth and unsecured products will be supportive of fee income. The trend in retail deposits too remains healthy, with the bank witnessing a sequential improvement in its CASA ratio to 48 per cent. We maintain a Buy rating with a target price of Rs 2,000 per share," Motilal Oswal Financial Services said.

Samir Bahl, CEO, Investment Banking, Anand Rathi Advisors said, "This is India's largest and most transformational merger in the Indian financial services sector. With this merger, HDFC bank gets an unparalleled advantage through the mortgage portfolio providing it with a quantum leap in distribution to semi-urban and rural areas with a huge opportunity to cross-sell bank products to a very sticky client base. The combined entity will be able to extract substantial synergy benefits which abode well for all stakeholders and shareholders. We are already seeing that in the market reaction to this unprecedented announcement today."

With the sharp rally in share price, the market value of HDFC Bank and HDFC were hovering around Rs 9,10,439 crore and Rs 4,81,992 crore at around 1.20 pm (IST). The total market capitalisation of Nifty majors stood at Rs 13,92,431 crore, higher than the market value of IT major Tata Consultancy Services (Rs 13,79,444.07), the country's second-largest company in terms of market capitalisation. Energy-to-telecom behemoth Reliance Industries (Rs 17,98,787.13 crore) enjoys the highest market capitalisation on D-Street.

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