Should You Buy India Financials ETF (INDF) on M&A Boom?

A lot has been happening in the financial sector of India with big-ticket M&As hogging the spotlight. Nifty India Financials ETF INDF has added 9.2% past month due to such activities despite upheavals in the global markets due to the Russia-Ukraine war.

The biggest merger in the history of India has been announced this month in the form of mortgage firm HDFC Ltd’s plan to join with HDFC Bank. After the merger, HDFC Bank will be 100% owned by public shareholders, and the existing shareholders of HDFC Ltd will own 41% of HDFC Bank. There was a spike in the share prices of the two entities right after the merger announcement.

HDFC Bank is India’s largest private sector bank focused on consumer and corporate loans, while HDFC Ltd is India’s largest private sector mortgage lender. One interesting area to watch in this merger will be whether this merger makes HDFC Bank eligible to enter India-focused stock indices, per Amit Anand, co-founder of INDF.

Due to the historical foreign investing limits, HDFC Bank was not present in the marquee indices that track India and emerging markets, making India’s banking behemoth unavailable to those index investors, according to Anand.

Apart from the HDFC deal, there was the news of Axis Bank’s acquisition of Citibank’s consumer finance business for Rs. 12,325 crore — the second biggest deal in India’s banking sector — deemed to be a great deal by some analysts. The acquisition enables Axis Bank to place itself as a strong contender in  some key segments such as credit cards.

Against this backdrop, investors must be interested in knowing about the ETF INDF in details.

INDF in Focus

Management of INDF pointed out that historically, the banking sector has grown faster than GDP. Although the momentum has slowed lately due to lack of corporate capex growth, the government is striving to boost the move by increasing its own spending on infrastructure (read: 3 Sector ETFs to Play 7%+ Growth Rate of India).

Also, per research conducted by Bloomberg and Goldman Sachs Global Investment Research, banks in Nifty are projected to record 25% earnings per share growth in calendar-year 2022. Banks offer decent valuation too, with a near-term P/E ratio of 19.7X against 22.2X P/E offered by Nifty.

As far as the holding is concerned, HDFC bank, ICICI Bank and HDFC Ltd take the top three positions with 19.29%, 14.33% and 13.20% share, respectively. HDFC Life (4.70%) and Axis Bank (4.50%) round out the top five positions. The fund has a total of 20 stocks and charges 75 bps in fees.

Any Caveat?

The fund is heavy on HDFC, no doubt.TheHDFC merger is expected to close over the next 18 months. The merger will broaden the scale of operation of the joined entity and strengthen the housing loan business and increase underwriting capacity. While some believe that HDFC Bank is more profitable than HDFC Ltd and is in a less advantageous position in this merger, a basket approach here is great because the fund currently has exposure to both HDFC Bank and HDFC Ltd. This rules out uncertainties related to the big-ticket merger, if there is any.

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Nifty India Financials ETF (INDF): ETF Research Reports
 
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