A predictable surprise | Value Research The announcement of the HDFC–HDFC Bank merger was always on the cards. What’s next?
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A predictable surprise

The announcement of the HDFC-HDFC Bank merger was always on the cards. What's next?

Did the announcement of the proposed merger between HDFC and HDFC Bank come as a surprise to you? As far as I'm concerned, on the day it happened, it did come as a surprise, in the sense that the news was not expected on that particular day. However, given the changing regulatory and operating environment of NBFCs vis-a-vis banks, this merger was always on the cards. It could have come six months later or a year, but it was coming.

In fact, it was one of those surprises which stops being a surprise the moment one learns about it. For most people who understood the industry, the reaction was 'Of course! That makes perfect sense'. Indeed, the immediate reaction in terms of the stock price of both companies encapsulated that response. The stocks jumped up, HDFC by 9.3 per cent and HDFC Bank by 10 per cent.

Then came the reaction, or perhaps I should say retreat. As I write this page, both stocks have declined for nine trading days straight, covering 16 calendar days. Even though this record may not get extended much further, I find the justifications being trotted out for this price decline to be emblematic of pretty much what is wrong with the general attitude of many equity traders or analysts.

Looking back at where HDFC and HDFC Bank are coming from, and the details of their businesses, there is little doubt that what we have here are corporate institutions of exceptional quality which are perfectly positioned to continue this success for years to come. In fact, I'll let you in on something that is supposed to stay confidential. Both these companies are a part of the list of recommended stocks on our Premium service, Value Research Stock Advisor. In fact, HDFC Bank has been on our list since November 2017, almost when our service was launched. During this period, we have re-issued the recommendation three times. The initial recommendation was made when the stock price was Rs 911.

Regardless of the immediate stock price, we have no intention of changing our recommendations. The timescale at which we analyse and recommend stocks is measured at least in years. The advantage that the merged business will have will carry it forward for a long time indeed. Both stocks will remain on our list of recommendations for the foreseeable future. Since the actual merger will take a year or more to actually be implemented, the only decision point for investors should be that in the weeks and months to come, is there any advantage in buying one or the other of them? That's something that members of Value Research Stock Advisor are getting inputs about from our analyst team. The attractiveness of the two stocks is beyond discussion for a long time to come.

So, then what of the equity markets' depressed attitude since April 4? What's the story with that? If you read what (some) analysts and the financial media are saying, you will learn that there are lots of supposedly negative points that can be made about the two companies. To take just one example, banks have to maintain a certain statutory proportion of their money in cash and in government securities. This is part of the basic safety framework of banks. Till the merger, HDFC does not have to do this but as a merged entity which is part of a bank, it will effectively have to do that.

This, the wise people say, will reduce margins. Surely, they are right. They are also so busy examining the leaves on a tree that they are not paying attention to the whole tree or to the forest. Obviously, there will be changes in the way the two companies operate. Some will make some things difficult and some will make things easier. What matters is the overall direction and the aggregate impact. Given the management and the strategic track record of the two, the overall impact will clearly be positive. If you are a real investor, that's the only thing that matters.

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This editorial appeared in Wealth Insight May 2022 issue. To read the cover story and other insightful analyses, columns and articles

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