Cost advantage for HDFC, says Rajnish Kumar; boost for HDFC Bank mortgage book, adds Rahul Arora

"When the cost comes down the combined entity gains in terms of cost efficiencies, and it is value accretive for both the shareholders of HDFC and HDFC Bank,” he analysed.

According to the deal, the share exchange ratio shall be 42 equity shares, credited as fully paid up, of the face value of Re 1 each of HDFC Bank for every 25 fully paid-up equity shares of the face value of Rs 2 each of HDFC.

Ajay Srivastava, CEO of Dimensions Corporate Finance Services, observed that the merger was because the HDFC stock wasn't performing as per expectations.

"The lagging stock performance of the HDFC has forced them to push their hand toward the merger because the investors and the stock options were suffering. So, more than the merit of the merger, I think it is a real pressure coming from the non-performance of the stock because the logic of not merging remains the same, nothing has changed in regulation, nothing has changed in terms of the provisioning, nothing has been in the reserve ratios," he said.

In the long term, Srivastava favours the merger but says there are many things to watch out for.

"We need to see how the merger happens, who heads this organisation, is it going to be the HDFC chairman, or is the MD going to head it?" he said. Later, in an investor call, the companies made it clear that HDFC Bank CEO would continue to lead the entity.

Rahul Arora, CEO of Nirmal Bang Institutional Equities, said that the announcement was a bolt out of a blue but not entirely surprising.

"I think, if you look at the cost of funds that HDFC Bank has vis-à-vis HDFC limited, I think this merger will obviously stand HDFC limited better from a cost of funds standpoint. If you look at HDFC Bank, their mortgage book is not that big and if you have listened to the last few conference calls, they have spoken about growing their mortgage book in a very material way. So, I think this vertical merger helps both entities in many ways because HDFC Bank becomes a very serious competitor to the merged entity rather than a very serious competitor to State Bank of India," he said.

Both HDFC and HDFC Bank stocks were locked in the upper circuit at 10 percent in early deals. HDFC shares were frozen at Rs 2,696 apiece on BSE and HDFC Bank at Rs 1,656.9.