Merged HDFC entity may see $200 million outflow; stocks slump

The merged entity of HDFC Bank and Housing Development Finance Corporation is likely to witness outflow by foreign portfolio investors to the tune of around $200 million as global index provider MSCI on Friday announced assigning lower weight to the company than the market expectations.

MSCI announced that it 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.

It was widely expected that the adjustment factor for computing the weight of the merged entity would be 1-times. With 1x adjustment factor HDFC’s merged entity’s weight in MSCI would have doubled. However, now it will remain more or less the same.

According to Nuvama Research, the tweaking in adjustment factor would 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 with 1x adjustment.

Adjustment factor is the weightage of a stock assigned within a particular index. At present, HDFC's weight is 6.74% in MSCI India index which may reduce to 6.5% post the merger, as per Nuvama's calculation.

“Based on the estimated post-event foreign room of HDFC Bank and pursuant to the MSCI Corporate Events Methodology (Section 1), to reduce the risk of reverse turnover, MSCI intends to add HDFC Bank to the Large-Cap segment of MSCI Global Standard Indexes with a foreign inclusion factor of 0.37 after applying an adjustment factor of 0.5," MSCI said in a statement.

Share price of HDFC twins tumbled by around 6% after the MSCI announcement. HDFC Bank slumped by 5.90% to close at Rs 1625.35 on the BSE. HDFC dipped 5.63% to Rs 2701.15. The twins were the biggest losers among the 30 stocks of the benchmark Sensex, which slumped by 695 points or 1.13%.

“The Indian market was dragged down by heavy selling in HDFC twins on fears of post-merger fund outflow,” said Vinod Nair, head of research at Geojit Financial Services.

HDFC Bank, India’s largest private sector lender, is expected to complete merger with its parent HDFC by July this year.