The National Stock Exchange may exclude the Housing Development Finance Corporation (HDFC) from the NSE Nifty 50 index in the coming weeks as the HDFC-HDFC Bank merger is likely to be completed a few months earlier than expected, analysts said. Glue maker Pidilite Industries is among the leaders to replace HDFC in the 50-stock index. “The (HDFC) stocks could then be excluded from all Nifty indices at the earliest by the end of December 2022 or by mid-January 2023 at the latest,” said Abhilash Pagaria, head of alternative and quantitative research at Nuvama Wealth Management. The housing finance company with a 5.5% weight in the Nifty could see an outflow of about $1.3-1.5 billion from the passive funds once it is excluded from the benchmark.
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This will be an ad hoc inclusion due to the mortgage lender’s removal from the index due to its final phase merger with HDFC Bank. The shareholders’ meeting to approve HDFC’s proposed merger with HDFC Bank is scheduled for November 25. The Nifty Indices Methodology book states, “In the event of a merger, spin-off, capital restructuring, or voluntary delisting, shareholder approval of equity is considered a trigger to initiate the substitution of such stocks from the index. through additional index reconstruction.”
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Since the indices’ weights are calculated based on free-float market cap, the exclusion of HDFC will redistribute most of the weights in the top 10 handy heavyweights. According to Nuvama, HDFC’s shares could see an outflow of more than $1.5 billion due to the exit from the benchmark indices, which could also affect HDFC Bank’s stock performance. Apart from Pidilite, Ambuja Cements (ACEM), Tata Power (TPWR) and SRF (SRF) are among the frontrunners to replace HDFC in Nifty 50. Pagaria said HDFC’s large 5.5% weight in the Nifty 50 index means the stock could see heavy selling from passive funds that closely track the benchmark index.
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Currently, more than 22 ETFs track the Nifty 50 index as the benchmark with a cumulative assets under management (AUM) of $30 billion (Rs 2.4 lakh crore). It is worth noting that HDFC shareholders will receive 42 shares of HDFC Bank for every 25 shares of HDFC held by them. Given the swap ratio, a sharp decline in HDFC’s shares ahead of the exit from the Nifty indices is likely to lead to a sell-off in HDFC Bank. In the Nuvama note, Pagaria dismissed concerns from some market participants that HDFC Bank would be excluded from the NSE indices after the merger. “In fact, once the merged company starts trading at a higher free float market cap, HDFC Bank will see an increase in weight,” he said.