HDFC Bank could potentially be deleted in Nov review: MSCI

MSCI's Raman Subramanian says HDFC Bank could be potentially deleted during their semi-annual portfolio-rebalancing due in November.

MSCI benchmark it is close to about USD 8 trillion benchmark today

Raman Aylur Subramanian

Executive Director-Index Research

MSCI

Morgan Stanley Capital International (MSCI) has cut weightage of HDFC Bank  to 1.89 percent from 5.4 percent, among other changes in their India and small cap index.

In an interview with CNBC-TV18, Raman Subramanian, Managing Director and Head of Index Applied Research-America, MSCI says during their semi-annual portfolio-rebalancing due in November, HDFC Bank could be potentially deleted.

Below is the verbatim transcript of the interview:

Q: The way forward, will there be another review in November and is HDFC Bank likely to go out all together if the Indian government doesn't permit further foreign institutional investors (FII) buying?

A: Let us try to understand what we have announced today so that you can much in perspective what we do and how that is reflected in our rebalancing. MSCI rebalances its global portfolios or global index two times a year; one we do it in May and second is done in November. We have announced today is the May semi annual index review and as part of the review what we do is the various investability requirements across different equities not only in India but across the globe. Therefore, specifically when we look at the investability, one of the criteria which is very crucial for the foreign investors is the availability of the shares and if the foreign group declines considerably the foreign investors. That is the time when we have to take action whether to captivate or to decide whether the stock should be included in the index or not. Although we haven't taken any decision regarding specific stock but we closely monitor the foreign group and if situation arises then according to methodology some of the stocks should be impacted and potentially deleted in the future.

Q: I want to know the next step therefore – you have brought it down to 1.89, if the rules do not change, further foreign investment in HDFC Bank will not be allowed at all or may not be possible at all. So, is it imminent that if the rules do not change in India, HDFC Bank will be taken out?

A: It is highly speculative to decide because one of the announcement we have made for that, we are capping the weight based upon the availability of the foreign group and we also indicated that if the situation doesn't improve, there is a potential clause which is there in the methodology to make certain action but this will be highly speculative to the fact whether this is going to happen or not because we have still six months of time from now to November and anything can happen post elections.

Q: Can you throw more light on the methodology that is used for the index and how much money is benchmarked etc?

A: If you look at MSCI global benchmark, the main uses of this benchmark are large global pension funds, endowments, hedge funds, asset managers, broker dealers, they all tracking and following MSCI benchmark to the extent that today it is close to about USD 8 trillion benchmark, the MSCI global benchmark but that is a sensible amount of money. In terms of methodology, it is a rule-based transparency. In that, we define the market and do size segment across large, mid and small and the large and midcap stocks are called as standard index and also, we have global smallcap index.

Also read:  Will HDFC Bank take a hit from MSCI rebalancing?

HDFC Bank stock price

On May 15, 2014, at 14:10 hrs HDFC Bank was quoting at Rs 784.00, up Rs 8.75, or 1.13 percent. The 52-week high of the share was Rs 800.40 and the 52-week low was Rs 528.00.

The company's trailing 12-month (TTM) EPS was at Rs 35.31 per share as per the quarter ended March 2014. The stock's price-to-earnings (P/E) ratio was 22.2. The latest book value of the company is Rs 186.16 per share. At current value, the price-to-book value of the company is 4.21.

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