HDFC Bank shares face sharp decline following merger with HDFC Ltd

Shares of HDFC Bank experienced a significant drop of over 3% on Wednesday, reaching a day's low at Rs 1,575 ($1 = Rs 83.05) per share. This decline came after the bank announced its completed merger with HDFC Ltd, which is expected to impact key financial metrics. The bank's shares, along with those of Reliance Industries and Infosys (NS:INFY), contributed to a downward trend in domestic indices in Wednesday's early trading.

The decline in HDFC stock was also influenced by several brokerages reducing their target prices. Nomura lowered the stock rating to 'Neutral' and reduced the target price, while domestic brokerages Kotak Institutional Equities and Investec also decreased their price targets for the stock. After an investor meeting, Nomura revised its price target to Rs 1,800, assessing the stock's value at 2.5 times the Book Value Per Share (BVPS) projected for June 2025.

Investor sentiment was negatively affected as HDFC Bank shares dipped amidst robust trading volume. This was largely attributed to the management's disappointing guidance on key metrics, including margins and net worth.

Further contributing to the decline was Nomura's downgrade of its rating for HDFC to Neutral. This decision came after an analyst call that detailed particulars of the merged entity. The brokerage firm highlighted potential pressure on net interest margins (NIM) over the next two to three quarters as HDFC Ltd's Q2FY24 opening book NIMs are at 2 percent versus 2.7 percent in Q1.

Nomura also pointed out four negative surprises from the analyst meeting: net worth adjustments having a negative 4 percent impact on FY24F BVPS, NIM cuts of 25bp in FY24F and 15-20bp in FY25-26F due to excess liquidity and accounting adjustments, higher cost-to-income due to accounting changes, and a sharp uptick in NPAs in HDFC Ltd's corporate loan book.

The merger's impact on HDFC Bank's shares was also reflected in the broader market, with the Sensex falling about 1% and trading below the 67,000 mark, while the Nifty 50 fell below the 20,000 mark to hit a low of 19,927.

HDFC Bank was also the top loser in Nifty 50 on Wednesday, with around 16 million shares changing hands on the NSE as of 9:50 am IST. The bank's shares saw a sharp intraday drop of as much as 4.07% to 1,562.7 rupees, marking the steepest fall since May 5.

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