Analysts see buying opportunity in HDFC twins as shares tank

Analysts said the sharp decline in HDFC Bank and Housing Development Finance Corporation (HDFC) has opened a new opportunity for investors to take a new stance as the long-term prospects for the combined entity look bright. Both stocks fell six percent each on Friday after an institutional investor report indicated both entities’ weighting in MSCI would drop to 6.50 percent from 6.74 percent.

By the way, HDFC is part of the MSCI World Index with a weight of 6.74 percent, while HDFC Bank is not part of the index. Both entities are about to merge.

The combined HDFC entity could see outflows of between $150 million and $200 million, as index aggregator MSCI said, in an update to clients, that it would use an adjustment factor of 0.50 to calculate the weight of the HDFC merged company.

Thereafter, HDFC and HDFC Bank fell by six per cent each to Rs 2,701 and Rs 1,625. The market capitalization of the two companies decreased by around Rs.63,800 crore.

Bright prospects

VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services said it was important to understand that the sharp correction in the HDFC twins of more than 5 per cent each had nothing to do with the fundamentals of these stocks, but was due to anxiety caused by expected outflows of around 150- $200 million from the merged entity.

He added that the recent financial performance of these two entities has been good, and the medium to long-term prospects for the merged entity are also bright.

Shryansh Shah, Research Analyst, Stoxbox, said the sharp drop in HDFC and HDFC Bank shares due to MSCI’s underweight is a technical reason and is a temporary phenomenon as the fundamentals of the two companies have not changed.

He added, “We believe dips should be used as a buying opportunity for the underlying portfolio as the combined entity will emerge stronger due to the massive economies of scale and synergies generated by the transaction.”