“You have to start setting arbitrage positions above 3% and keep adding at higher levels,” said Abhilash Pagaria, head of alternative and quantitative research at Nuvama Institutional Equities. “HDFC Bank’s cash holder should switch to HDFC in proportion to the swap ratio, as HDFC is trading at a 3% discount.”
HDFC Group has announced the merger of its housing finance company HDFC with HDFC Bank at a share exchange 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. HDFC shares are currently trade at ₹2,627.10 each, while shares of HDFC Bank are trading at ₹1,610.35.
“The merger is expected to be completed within the next two months, and depending on the swap ratio, the gap will be covered over time,” Chandan said. Tapariaanalyst at Motilal Oswal Financial Services.
The merger, announced on April 4, is expected to be finalized by June 2023.
National Company Law Tribunal (NCLT) and stock exchange approvals are in place. The proposal awaits the green light from other regulators, including the Reserve Bank of Indiathe Securities and Exchange Board of India, the National Housing Bank and the Insurance Regulatory and Development Authority of India. Usually, the discount should narrow before the merger closes, not widen, but what defies this logic is the continued sell-off of Indian stocks by foreign funds, particularly in banking and financial stocks.
Foreign portfolio holding in HDFC decreased from 72.14% in December 2021 to 67.22% in December 2022.
“HDFC is part of the MSCI Emerging Market Index, while HDFC Bank is not. HDFC is therefore seeing the impact of the sale, and the gap has been steadily widening so far in 2023,” Pagaria said. of Nuvama Institutional Equities.