India’s largest housing finance company HDFC Ltd was knocked out of its ten most valuable companies on April 19 after its shares fell nearly 19 per cent in the past two weeks. HDFC now ranks eleventh. The ten most valuable companies in India are Reliance Industries Ltd, Tata Consultancy Services Ltd, HDFC Bank Ltd, Infosys Ltd, ICICI Bank Ltd, Hindustan Unilever Ltd, Adani Green Energy Ltd, State Bank of India, Bharti Airtel and Bajaj Finance Ltd.

Shares of HDFC have lost 12.24 per cent in the past year, while the Nifty 50 has gained 20 per cent. HDFC Bank fell 3 per cent during the period. The sharp decline in HDFC stock continued despite announcing a massive merger with its banking subsidiary HDFC Bank. On April 4, HDFC announced that it would merge with HDFC Bank. The share conversion ratio is 42 shares of HDFC Bank share capital for every 25 shares of HDFC Ltd.

Both HDFC and HDFC Bank surged more than 10 per cent following the merger announcement. However, they have wiped out all the gains from expectations that the merger won’t address investor concerns about slowing growth and falling margins. Shares in HDFC have fallen nearly 19 per cent since the April 4 announcement, wiping more than Rs 90,000 crore off its market value. Shares in HDFC Bank suffered a similar drop, with investors taking more than Rs 166 crore off their income.

Analysts believe loan growth will likely slow after the merger and will be more dependent on economic conditions, and the ability to deliver superior loan growth will be a challenge. “Key risks are lower-than-expected credit growth due to macroeconomic weakness due to Ukraine-Russia conflict, further margin weakness due to slower retail credit growth/regulatory buffers built up before the merger, and delays in obtaining regulatory approvals for the proposed merger,” Emkay Research said in a note to investors.

According to Kotak Institutional Equities, the near-term outlook will be to manage the debt transition. The bank will see a shift in its liability structure, and funding will be critical to understanding near-term margins. It is unclear whether the current structure will be approved, given that the bank will hold a substantial stake in a non-bank subsidiary.

Given the difference in returns, the combined entity’s return on equity could be slightly diluted. In addition, there will be repercussions due to regulatory requirements, analysts said. Additionally, the sell-off in HDFC shares was driven by foreign portfolio investors who have been diluting their stakes in the bank and non-bank lenders over the past six months. Shares of HDFC were down 3.5 per cent at Rs 2,186 on the National Stock Exchange at 11.45 am.