Private lender HDFC Bank has been underperforming over the 3-year and 3-month period. Now over the past 3 years, HDFC Bank has delivered only a 60 percent return, while Nifty, ICICI Bank, and SBI have done better and delivered higher returns of 83 percent, 153 percent, and 201 percent respectively.

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In the last 3 months, HDFC Bank's performance has been relatively modest with a 4.5 percent increase, while Nifty, ICICI Bank, and SBI have shown higher increases of 9.8 percent, 8 percent, and 8.5 percent respectively.

HDFC Bank post its merger with HDFC Ltd will become the 10th largest bank in the world and the merger would give it access to a large retail customer asset pool which Goldman Sachs believes has become the key franchise product to strengthen customer engagement for retail banks in India. In July 2023, HDFC Ltd shareholders will receive 42 shares of HDFC Bank for every 25 shares they hold and its record date is awaited.

Also Read: Apple taps HDFC Bank to launch credit card, in talks with NPCI for Apple Pay: Report

Nifty Bulls Cheering For HDFC Bank To Perform: This merger will result in the merged entity having a weightage of 14.5 percent to 15 percent on the Nifty index. So the Nifty Bulls will also be counting on the bank to start performing and supporting the index.

Technical Hurdles: In the near term, there are a couple of technical factors that could potentially impact HDFC Bank's performance. Firstly, SEBI rules restrict mutual fund schemes from investing more than 10 percent in a single security and secondly, there were expectations of an increase in weightage on the MSCI index but that has not happened which has been a disappointment.

Fundamentally Well Placed: HDFC Bank fundamentally though is well placed based on the following factors:

a. Valuations: The group businesses associated with HDFC Bank, such as HDFC Life, HDB Fins, and HDFC AMC, have an estimated value range of Rs. 190-220 per share.

Also Read: Goldman Sachs expects HDFC Bank to emerge stronger post merger, sees 27% upside

b. Standalone Business: Based on FY25 numbers, HDFC Bank has a price-to-earnings ratio of 13.5x compared to its 5-year average of 20x. The price-to-book ratio stands at 2.2x compared to the 5-year average of 3.5x.

c. Healthy Ratios: HDFC Bank's return on assets (ROA) ranges from 1.9 percent to 2.1 percent, and its return on equity (ROE) ranges from 15 percent to 16 percent.

Merger Ratio: The merger ratio is in favor of HDFC Ltd, with HDFC Ltd shareholders receiving 1.7 percent more in the merged entity so if you are convinced of the merged entity then buying into HDFC Ltd will make more sense.

First Published:Jun 23, 2023 5:23 PM IST