Detailed Analysis of HDFC BANK and HDFC LTD Merger – Target Price 2091

Synergies of Merger

The merger will reduce HDFC BANK’s vulnerability towards unsecured loans as it will enhance the proportion of loans towards the housing loan portfolios which are secured by mortgage of assets.
Merged entity will enjoy superior capital efficiency as housing loans are less risky than retail loans, reducing the bank's nonperforming assets.
HDFC LTD has a humongous 77 lakh customers and 21 lakh depositors, and HDFC Bank has a 6.8 crore customer base. This merger will bolster the customer base of HDFC group and will enable it to cross-sell its products or services to customers or depositors of each other.
One of the priority sector lending areas is lending towards affordable housing schemes. The merger will help HDFC Bank in meeting the requirement of priority sector lending.
HDFC bank CASA ratio is 48 percent depicting a higher share (48 percent) of deposits in current and savings accounts. Due to the merger, HDFC Bank will be able to utilize its cheaper funds and make them available to HDFC LTD customers and offer better housing products at cheaper interest rates thereby acquiring market share from its peers.
HDFC Bank is expected to reap stupendous benefits from the merger as its loans are expected to increase by 42 percent and it will expand its market share from the current 11 percent to 15 percent. Further, its earnings per share are expected to increase by 200 basis points and its return on equity is anticipated to also increase by 200 basis points.

The Board of HDFC announced on Monday (4/4/22) its amalgamation with HDFC Bank LTD.
HDFC LTD will cease to exist after the merger and the merged entity will be HDFC BANK. The subsidiaries of HDFC LTD will also become subsidiaries of HDFC BANK.
Swap ratio in merged entity will be 42:25. That is for every 25 shares in HDFC LTD Shareholders will receive 42 shares of HDFC BANK.
Post the merger HDFC Bank will be 100% owned by public shareholders as 41 percent of the equity of HDFC BANK will be held by shareholders of HDFC LTD.
Merger is expected to be completed within 18 months, subject to completion of formalities and completion of conditions.

HDFC LTD (Housing Development Finance Corporation Limited) was established to promote ownership of houses by providing long-term finance to households. It is the parent company of HDFC BANK and other subsidiaries such as HDFC LIFE, HDFC Asset Management Arm, HDFC holdings limited, HDFC Credila Financial Services Limited, etc.
HDFC BANK LIMITED is India’s premier bank. It is a private sector bank providing a range of banking services covering commercial and investment banking on the wholesale side and branch banking on the retail side. It has subsidiaries such as HDB Financial Services Limited, HDFC Securities, etc.

The merger news was taken very positively by the market as both HDFC Twins saw their biggest intraday gain in the past 13 years. HDFC shares closed at a 9.3 percent gain and closed at 2679, while HDFC Bank closed 10 percent higher at 1656.
The share price is still attractive even after a spectacular gain on Monday (4/4/22) if the merger is executed as per the plan it will help HDFC Bank to leapfrog its earnings by 200 basis points, which will boost the market price in the future.

We recommend a buy rating on HDFC BANK with a target of Rs. 2091 by end of FY 23, the target of Rs. 2550 by end of FY 24 and the target of Rs.3110 by end of FY 25. However, we will review our target post the development.

HDFC BANK (Acquiring Company) + HDFC LTD (Acquired Company) = HDFC BANK (Merged Entity)

Present Number of shares HDFC Bank = 554.23cr.

Present Number of shares HDFC LTD = 181.4cr

Swap Ratio = 42: 25

Total shares HDFC Bank= 554,23cr + (181.4cr*42/25) = 858.98cr shares

Total estimated earning FY 22 = 57611cr

Merged EPS FY 22 = 57611/858.98= 67

Present growth rate in EPS = 20 %

Estimated growth rate after merger = 22%

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