Best of both the worlds! Nirmal Bang sees 30% upside in HDFC Bank post merger announcement with HDFC Ltd

After closing with nearly 10% gain on Monday on merger news, shares of HDFC Bank dropped over 2% in the afternoon trade on Tuesday. Brokerages and experts are bullish on HDFC Bank after a scheme of amalgamation was announced between HDFC Ltd and HDFC Bank. As per the arrangement, HDFC’s shareholders will receive 42 shares of HDFC Bank for every 25 equity shares held in HDFC. Also, post-merger, HDFC’s existing shareholding in HDFC Bank will extinguish and existing shareholders (of HDFC) will own 41% in the new bank, which will be 100% owned by public shareholders.  

In this regard, brokerage house Nirmal Bang says that the decision to merger HDFC with HDFC Bank brings best of both the worlds.  

The brokerage house maintained a buy rating on the leading private lender's stock with a target price of Rs 2151 a share, which is an upside of 30% on Rs 1654, the price at which share traded on Monday.  

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"Overall, we see the merger being value-accretive for shareholders, primarily driven by lower CoF for the mortgage business and cross-sell opportunities. We maintain BUY on HDFCB with a target price of Rs 2,151 (based on 3.6x FY24E ABVPS + value of subsidiaries). If we value the merged entity for the standalone business (including mortgages) and add the value of subsidiaries, the upside could be much higher," it said.  

Market experts view it as a positive development and a win-win situation for both entities.  

The proposed transaction will enable HDFC Bank to build its housing loan portfolio and enhance its existing customer base, says Santosh Meena, Head of Research, Swastika Investmart Ltd. For HDFC Ltd., the biggest gain will be access to well-diversified low-cost funding and a huge customer base of HDFC Bank Ltd, Meena said.   

"The merger of HDFC with HDFC Bank is an unprecedented mega-merger which will benefit all stakeholders. The shareholders of both entities stand to benefit substantially as already reflected by the sharp up moves in their stock prices. For shareholders, this is far better than a buyback at higher prices," says VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.    

Vijaykumar is of the view that the merged entity will gain from the synergies of the merger. "The mortgage business will gain from the low-cost funds of the bank and the bank will gain from HDFC's competence in mortgage lending. The Indian economy will benefit from larger investment by the merged entity in large infra projects. India will have a large global bank," he adds.  

Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.