The merger of HDFC and HDFC Bank is expected to be completed in the next 2-3 months, and the spread would narrow closer to the merger date.
“One should start to set arbitrage positions above 3% and continue to add at higher levels,” said Abhilash Pagaria, head of alternative & quantitative research at Nuvama Institutional Equities. “The cash holder in HDFC Bank should switch to HDFC in proportion to the swap ratio as HDFC trades at a 3% discount.”
The HDFC Group has announced the merger of its housing finance company HDFC with HDFC Bank at a share swap ratio of 25:42. Holders of HDFC shares on the record date will receive 42 shares of HDFC Bank for every 25 shares held in the mortgage lender. Shares of HDFC are currently trading at ₹2,627.10 apiece, while HDFC Bank shares are trading at ₹1,610.35.
“The merger is expected to be completed in the next two months, and as per the swap ratio, the spread will be covered as the days pass,” said Chandan Taparia, analyst at Motilal Oswal Financial Services.
The merger, announced on April 4 last year, is expected to be completed by June 2023.
Approvals from the National Company Law Tribunal (NCLT) and stock exchanges are in place. The proposal awaits the nod from other regulators, including the Reserve Bank of India, the Securities and Exchange Board of India, the National Housing Bank, and the Insurance Regulatory and Development Authority of India.Usually, the discount should narrow ahead of the closure of the merger and not widen, but what defies this logic is the continued selling of Indian equities by overseas funds, especially in banking and finance stocks.
Foreign portfolio holding in HDFC has declined from 72.14% in December 2021 to 67.22% in December 2022.
“HDFC is a part of the MSCI Emerging Market index while HDFC Bank is not. So HDFC sees the selling impact, and the spread has continuously widened so far in 2023,” said Pagaria of Nuvama Institutional Equities.
