India’s largest housing finance company HDFC Ltd was on April 19 knocked out of the country’s 10 most-valued companies in terms of market capitalisation after its shares slumped nearly 19 percent in the last two weeks.
HDFC now ranks at the eleventh spot. The top 10 most valued firms of India's are Reliance Industries Ltd, Tata Consultancy Services Ltd, HDFC Bank Ltd, Infosys Ltd, ICICI Bank Ltd, Hindustan Unilever Ltd, Adani Green Energy Ltd, State Bank of India, Bharti Airtel and Bajaj Finance Ltd.
Shares of HDFC have fallen 12.24 percent over the past one year as against 20 percent rise in the Nifty 50 index. HDFC Bank was down 3 percent in this period.
The steep decline in HDFC shares continued despite the announcement of a mega merger with its banking subsidiary HDFC Bank. On April 4, HDFC announced that it will merge operations with HDFC Bank. The share exchange ratio was at 42 equity shares of HDFC Bank for every 25 shares of HDFC Ltd.
Both HDFC and HDFC Bank surged over 10 percent after the merger announcement. However, they have since erased all the gains on the expectations that the merger will not address investor concern over slowing growth and declining margins.
The HDFC stock declined nearly 19 percent since the April 4 announcement, wiping off more than Rs 90,000 crore in market capitalisation. HDFC Bank shares too suffered a similar fall with investors left poorer by over Rs 1.66 lakh crore.
Analysts believe that after the merger, loan growth is likely to be slower and will be a lot more dependent on the economic conditions and the ability to distinctly deliver superior loan growth would be a challenge.
"Key risks are slower-than-expected credit growth amid weakening macros due to the Ukraine-Russia conflict, further softness in margins due to slower retail credit growth/regulatory buffer built-up in the run-up to the merger, and delay in getting regulatory approval for the proposed merger," said Emkay Research in a note to investors.
According to Kotak Institutional Equities, the near-term outlook would be to manage the liability transition. The bank would see a shift in its liability structure and the funding of this would be quite critical to understand near-term margins. It is unclear if the current structure would be approved, given that the bank would have a significant stake in non-banking subsidiaries.
Return on equity is likely to dilute marginally for the merged entity, given the differences in return ratios. Also, there would be an impact due to regulatory requirements, analysts said.
Further, the selling in HDFC shares have been driven by foreign portfolio investors who have been diluting their stakes in bank and non-bank lenders over the past six months.
At 11.45am, shares of HDFC were down 3.5 percent at Rs 2,186 on the National Stock Exchange.
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