7 reasons why Saurabh Mukherjea’s firm thinks HDFC merger is a godsend for shareholders


NEW DELHI: HDFC twins have emerged as the biggest drag for the market, and portfolio of most investors in the last few days. HDFC Bank has fallen for nine consecutive sessions while HDFC has fallen for in eight of the last nine sessions.

The selloff that has eroded about Rs 3 lakh crore of investor money and has no sign of abating began a day after heavy buying in both counters just after the merger announcement. However, as the impact became clearer, investors started booking profits. Weak March quarter numbers of HDFC Bank added fuel to the fire. Both stocks now trade much lower than how they traded before the merger announcement.

Analysts have pointed out that even as there are positives in the merger decision, everything is not as hunky dory as it is being portrayed. They have underlined higher cost of capital and marginal hit to profitability among the concerns emerging out of the merger.

“Investors are expecting the cost of funds of HDFC bank to go up post the merger. In 4QFY22, HDFC Bank reported slower NII (net interest income) growth and lower NIMs (net interest margins). The merger can reduce the NIMs further,” said Ajit Kabi, Banking Analyst at LKP Securities.

But Marcellus Investment Managers, founder and promoted by star fund manager Saurabh Mukherjea, has come out in defense of the merger. The money manager has outlined at least seven implications that it thinks are extremely positive.

“The HDFC-HDFC Bank merger is a fitting finale to crown Deepak Parekh’s career as India’s smartest capital allocator. The combined entity will be value accretive for both sets of shareholders and it has ensured that the succession planning for HDFC is taken care of,” said Marcellus in a newsletter on Tuesday.

According to Marcellus, which owns HDFC Bank in its portfolios, following are the key implications from the merger:

For HDFC shareholders:

  • Increasing competitive pressure from banks: Given that banks will continue to have a cost of funds advantage, HDFC shareholders are better off merging with an entity which has one of the lowest cost of funds in the country.
  • Succession Planning: Most of the senior management of HDFC is approaching retirement. The merger solves the succession planning issue as the merged entity will be run by the HDFC Bank management.
  • Removal of regulatory arbitrage: Over time, it is expected that some of the advantages of the NBFC structure are likely to go away. Hence this merger is a timely exercise considering the tighter regulatory regime.

For HDFC Bank shareholders:

  • Increase in tenure of retail assets: In retail loans HDFC Bank has to disburse 65% of the opening AUM to generate 20% loan growth every year versus 30% for other large private banks. With merger, the share of housing assets will increase materially, leading to lower run-off and higher steady state retail assets growth.
  • Disbursement growth: The bank will be able to leverage upon its large footprint to originate more housing loans. According to estimates, the consolidated entity will have 20%+ market share in mortgages.
  • Ability to cross sell to a broader set of customers: Post the merger, the bank will get access to a large pool of untapped customers who can be cross sold, both, mortgages and other products.
  • RoA accretive: We believe whilst the merger is NIM dilutive (given that mortgages have lower spreads compared to other retail products), the merger will be RoA and EPS accretive.

So, do other analysts who vaunted negatives of the merger see these positives as well? Yes, but they think it will take time to fructify. Thus, they are positive on HDFC Bank with a long term view.

“We believe the stock price movement in momentary, and the superior asset quality and lower provision is likely to keep the shareholders return intact. In the medium term, the stock can witness some pressure but in the long run it may outperform the sector,” said Kabi.

VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, also said there are some concerns regarding the marginal hit to profitability of the merged entity due to higher SLR and CRR requirements.

“But the weakness in HDFC twins after the merger announcements is due to sustained selling by FPIs and shorting by speculators exploiting the FPI positioning in the stocks. From the valuation perspective HDFC twins are attractively valued, the short-term technical weakness notwithstanding.”

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