Pidilite may enter Nifty 50 once HDFC gets taken off after merger

The adhesive maker's inclusion to be ad hoc; analysts divided over treatment around HDFC's removal

Adhesive maker Pidilite Industries is likely to replace Housing Development Finance Corporation (HDFC) in the Nifty 50 index. This will be an ad hoc inclusion on account of the mortgage major’s expulsion from the Nifty index—tracked by funds with assets of over $30 billion—on account of its merger with HDFC Bank, which has entered final stages.

Since both HDFC and HDFC Bank are members of the Nifty and Sensex, the merger will result in the number of index constituents dropping from 50 to 49 in the Nifty and from 30 to 29 in the Sensex.

“Pidilite is a high probability ad hoc inclusion to the Nifty index, with Tata Power a lower probability inclusion candidate,” said analyst Brian Freitas of Periscope Analytics, who publishes on Smartkarma.

Shares of HDFC rose 0.2 per cent, while those of HDFC Bank were up 0.4 per cent on the NSE. The Pidilite stock gained 2.7 per cent on Monday.

Analysts seem to be divided on the treatment. A few brokerages said HDFC’s removal could lead to a $1.5 billion churn. Some believe HDFC’s explusion and increase in weightage of the merged entity will take place simultaneously to avoid churn.

“Firstly, HDFC will be deleted from the Nifty. But passive trackers will not need to sell the stock since there will be an increased number of index shares for HDFC Bank and the passive trackers will receive shares in HDFC Bank for their shares in HDFC. We estimate the merged entity will have a weight of around 13.9 per cent in the Nifty,” he added.

HDFC has 5.5 per cent weightage in the Nifty. If the stock has to be removed the weightage will have to first be divided among all the Nifty components and following the completion of the merger, the weights of all index components will once again be reduced.

“I expect $1.5 billion (54.5mn shares) of selling from index funds/ETFs on the back of this…Whenever the merger is effective, the weight of HDFC Bank will go up to compensate for the deletion of HDFC. So, this issue is only a temporary issue,” said Suresh Ganapathy, Head of Equity Research at Macquarie Capital in a note.

Sources close to the exchange said the index composition team is examining the issue.

“This is the first time such a major merger between two index components is taking place. The basic principle is to minimize unnecessary churn in the index. Most global indices simultaneously remove the stock and increase weightage of the merged entity,” said a source.

Analysts that track index composition said they have reached out to NSE Indices to understand the treatment it plans to adopt during HDFC and HDFC Bank’s merger. Both NSE and BSE follow a different approach. BSE excludes a constituent from the index closer to the effective date of merger. NSE, on the other hand, implements the change in advance.

The merger between financial sector behemoths HDFC Bank and parent HDFC could be completed as early as this quarter or early next quarter.

Last week, HDFC and HDFC Bank announced that the National Company Law Tribunal (NCLT) had ordered convening a meeting of its equity shareholders on November 25 to consider and approve the scheme of amalgamation. About a month after the NCLT’s approval new shares of the merged entity could be allotted.

The HDFC Conundrum

• Merger between HDFC and HDFC Bank nearing final stages
• The merger will create a need for ad hoc inclusion in Nifty
• Pidilite seen as a front runner to get added to Nifty
• But analysts are divided over the treatment
• Some say HDFC’s removal will lead to a $1.5-billion churn
• Simultaneous removal of HDFC and increase in weight of merged entity will help avoid the churn
• NSE may soon provide clarity on the issue