Overseas funds stay bullish, say merger a win-win for shareholders of both companies

Mumbai: Overseas fund managers have cheered the announcement of HDFC's merger with HDFC Bank. Both the stocks have been favourites of foreign investors, who are optimistic about the business opportunities after the deal is complete. It could also partly resolve the issue of high foreign ownership of HDFC Bank, they said.

"The merger offers opportunities for higher cross-sell of bank accounts to HDFC clients and mortgages to HDFC Bank clients and other products to the whole client base," said Samir Arora, founder of Helios Capital in Singapore.

"The merger may also help resolve the technical issue of high FII ownership of HDFC Bank since HDFC's stake in HDFC Bank is classified as foreign holding and now that portion of foreign holding will be cancelled."


Shares of HDFC Bank ended up 10% at ₹1,656.45 on the merger announcement on Monday while those of HDFC ended up 9.3% at ₹2,678.90. HDFC Bank's shares have risen 14.3% in the last year and HDFC shares have risen by 9.5%, underperforming the Sensex which has gained 23.3% in the same period.

Overseas money managers said they continue to be bullish on both businesses.

"It always made sense to be together but we weren't expecting it. We still like both businesses," said Hugh Young, chairman, Aberdeen Asset Management Asia.

Among notable foreign investors, EuroPacific Growth Fund held 2.4% in HDFC Bank as of the December quarter. Among other large institutions, LIC held 2.6%.

Mark Matthews, head of research-Asia at Bank Julius Baer said the merger was long overdue. "This is a win-win for the shareholders of both companies, as the holding company discount of HDFC should disappear, while HDFC Bank will benefit from the synergies of a merger," said Matthews.

"However, given the merger ratio is already out and the estimated timeline for completion of the merger, we believe arbitrage play is over."

Foreign brokerages maintained a bullish stance on HDFC Bank, with the planned merger expected to expand its loan book by 40%.

Jefferies has maintained a buy with a ₹2,160 price target while Macquarie has retained an outperform with a target price of ₹2,005.

Analysts are divided on the extent of benefit from expansion in headroom for foreign portfolio buying.

Jefferies said foreign shareholding in the bank will be at 65-67%, implying 7% headroom for foreign investors in the merged entity.

Macquarie's head of financial services research Suresh Ganapathy said it looks like HDFC will get out of MSCI India as it merges into HDFC Bank and HDFC Bank will not get included in MSCI India as the headroom is less than 15%. MSCI India requires more headroom for inclusion.

Group subsidiaries such as HDFC Asset Management Company ended up 3.4% at ₹2,352.25, and HDFC Life Insurance Company gained 3.8% at ₹571.55.