HDFC twins sink as Street fears MSCI blow may trigger $200 mn outflow

Shares of HDFC and HDFC Bank dropped up to 6 per cent. The Street had expected inflows worth $3 billion by foreign portfolio investors

Shares of HDFC Bank and HDFC tumbled up to 6 per cent inon the BSE on Friday after report suggested that MSCI has decided to use an adjustment factor of 0.5-times while computing the weightage of the merged entity, against expectations of an adjustment factor of 1-times. 

While shares of HDFC Bank cracked 5.9 per cent (Rs 1,625.35), those of HDFC Ltd plunged 5.6 per cent (Rs 2,701). Both these counters were the top draggers on the benchmark indices, which ended 1 per cent down.

According to a note by Nuvama Research, global index provider MSCI intends to add the merged entity of HDFC Bank and HDFC to the large cap segment of MSCI Global Standard index with an adjustment factor of 0.5-times, which could lead to an outflow by foreign portfolio investors (FPIs) worth $150-200 million as against the Street's expectation of an inflow worth $3 billion.

Adjustment factor is the weightage of a stock assigned within a particular index.

At present, HDFC's weight is 6.74 per cent in MSCI India index which may reduce to 6.5 per cent post the merger.
 

"We had estimated the foreign room for the merged entity to be around 18 per cent which is above (the minimum requirement of) 15 per cent. 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," Nuvama Alternative & Quantitative Research's report said.

Nuvama, however, said MSCI will continue to monitor the event and make further announcements as more information is available. 

Q4FY23 results of HDFC and HDFC Bank

In the March quarter of FY23, HDFC Bank reported a 21 per cent year-on-year (YoY) rise in consolidated net profit to Rs 12,594.5 crore for the quarter ended March 31. It clocked a 20.3 per cent YoY growth in consolidated net revenue to Rs 34,552.8 crore during the quarter, against Rs 28,733.9 crore recorded during the quarter ended March 31, 2022. Net interest income (NII), meanwhile, expanded by 23.7 per cent to Rs 23,351 crore YoY.

HDFC Ltd, on the other hand, logged a 20 per cent year-on-year growth in net profit at Rs 4,425 crore in the quarter ended March 2023 on robust NII. Further,  assets under management (AUM) grew by 10.71 per cent at Rs 7,23,988 crore at end of March 2023 as against Rs 6,53,902 crore in the previous year. Individual loans comprised 83 per cent of AUM.

Global brokerage Macquarie has assigned an 'outperform' rating to HDFC with a target price of Rs 3,060, while those at Nomura have given a 'Buy' rating and a target price of Rs 3,100.

Back home, Motilal Oswal Financial Services has a 12-month target of Rs 3,290 as it believes continues to have a strong ‘right to win’ in its standalone Mortgage business.

"The management shared that it has not witnessed any perceptible change in demand for mortgages, despite the high interest rates and that a large proportion of customers have seen only their tenor increase rather than any EMI increase. HDFC achieved its highest ever monthly disbursements in Mar’23 and expects this positive momentum to continue throughout FY24. Commentary on the existing mortgage demand has been divergent across the different lenders in the mortgage ecosystem," it said.

We have increased our FY25 EPS estimates by 2 per cent to factor in lower credit costs. We expect HDFC to deliver an AUM and PAT CAGR of ~14 per cent each over FY23-25, which will translate into a core RoA/RoE of 2 per cent/14 per cent in FY25, it added.