HDFC Bank’s weighting on the MSCI India Index is set to double. Does it really matter?

Once HDFC’s overseas shareholding drops beneath 55%, its value successful the scale doubles–though not immediately. The authoritative announcement is expected connected 13 August and the existent accommodation connected 30 August.

Why 55%?

To cognize wherefore the 55% overseas shareholding is the magic fig for HDFC, it’s important to recognize MSCI’s weighting methodology. Under the company’s rules, the scale assigns afloat value to a institution erstwhile the stock’s overseas shareholding drops beneath 75% of its overseas ownership limit.

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For HDFC Bank, 75% of the overseas ownership bounds of 74% works retired to 55%. So if HDFC Bank’s overseas shareholding is little than 55% it volition person afloat value connected the index, but if it is 55% oregon higher, the value drops to half. With the bank’s overseas shareholding present beneath 55%, its value is expected to treble from 4% to astir 8%.

Investors look to beryllium excited astir this method milestone–HDFC Bank’s shares person been climbing implicit the past month. The bank’s overseas shareholding stood astatine 55.54% astatine the extremity of March and investors who had been hoping it would driblet beneath 55% by the extremity of June saw their privation granted.

The implications

What does a higher value mean? There are 2 categories of overseas funds–active and passive. Passive funds replicate the MSCI India Index, conscionable similar Nifty Index funds. Active funds usage the scale lone arsenic a benchmark, and their positions whitethorn beryllium underweight oregon overweight connected definite stocks. While passive funds volition person to bargain much if HDFC’s value increases, progressive funds whitethorn oregon whitethorn not buy.

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Active funds are successful information improbable to bargain HDFC Bank banal arsenic their investments are driven chiefly by fiscal performance. Following the unimpressive nett involvement borderline and deposit maturation successful Q3 FY24, overseas organization investors had reduced their involvement successful HDFC Bank to 47.8%, from 52.3% during the March quarter, dragging the banal down from its quarterly highest of ₹1,684 per stock to a debased of ₹1,364. Thus, the existent banal terms of ₹1,728 whitethorn not entice them.

HDFC Bank vs ICICI Bank

In fact, the comparative valuation of HDFC Bank is nary longer appealing arsenic immoderate investors mightiness person preemptively built positions successful the stock, anticipating the weighting increase. Even aft deducting the valuation of subsidiaries astatine ₹250 a stock from the existent marketplace price, the bank’s banal is priced astatine 2.6 times the adjusted publication worth based connected FY24 earnings, arsenic compared to 3.1 times for ICICI Bank. 

ICICI Bank’s superior instrumentality connected assets for FY24 (2.4% against HDFC Bank’s 2%) deserves a valuation premium.

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Over the past year, HDFC Bank’s shares person been flattish portion ICICI Bank’s person returned 30%. It whitethorn beryllium tempting to see buying the underperforming stock, but investors should enactment that the discount to ICICI Bank’s valuation is apt to persist unless instrumentality ratios amended substantially.

For now, determination are 2 important events to ticker retired for–HDFC’s Q1 FY25 net connected 20 July and the Union Budget. Apart from these 2 captious events, the comparative valuations of the 2 banks merit much attraction from investors than the ‘magic’ 55% number.