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The HDFC Merger – Future Growth or Present Necessity?

The HDFC Bank – HDFC Merger

It has been nearly 2 weeks since the two entities announced the merger. After the initial euphoria, the markets have settled, and the buzz around the merger has also died down.

So is it good for the companies, or not so good?

Knee jerk reaction to the merger news saw both stocks spike up nearly 15% at one point on the day the merger was announced. However, since then the stocks have retraced all of the upmove, and are now actually lower than the day before the merger was announced. So as far as the stock market goes, the merger seems to be not very good news.

Let’s decode further. Whenever you see a merger or an acquisition, outside of the positive stories spun by the media and company managements, as an analyst, always ask the question – “Why now?”. What caused this merger to happen? We had asked the same for PVR-Inox deal as well in our newsletter.

NBFCs have a problem as they grow larger – they need access to low cost funds. A bigger NBFC almost always start’s seeing profitability and return ratios drop due to this issue, since they do not have access to low cost Current and Savings account deposits. This was the reason HDFC ltd was being valued lower than other entities, and even HDFC Bank. A merger with HDFC Bank gives them a direct access to low cost deposits, which is similar to them getting a banking license. So for them, it was a good deal. HDFC Bank on the other hand, was getting access to longer maturity loans (home loans). These are more predictable and allow you to make money over a period of time. Contrast this to a personal loan which you will have to keep giving out every few months to keep the capital deployed.

Is it all great?

So far so good. But if it was so obvious and good for both entities, why did they wait till now? The merger discussions have been in the news since 2015. Very rarely in a merger or acquisition, do both entities benefit. Usually, it is better for one entity as compared to the other. But both companies have to give a positive story. In our opinion, HDFC Bank does not stand to gain too much from this merger, unless they are able to cross sell a lot of products to HDFC Ltd customers. And since it is the HDFC Bank’s stock that is going to remain listed, the stock prices have given up the gains due to the merger.

Of course, the entity and its execution capabilities cannot be doubted. But you have to ask if HDFC Bank was better off without HDFC Ltd in this. This to us looks a merger necessary for HDFC Ltd, as against a potential opportunity that came their way.

We have left out some more technical issues that can come up due to the merger. For example the entity weight reaching nearly 12-13% in the index. So mutual funds may not be able to hold beyond 10%. This was something we saw with Reliance as well.

What are your thoughts on the merger?


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