Are HDFC Bank's best days over? FIIs & mutual funds are confusing investors (2024)

From investor darling to a hard sell, it has been a frustrating few years for HDFC Bank investors. Once the darling of the Big Boys club, lapped up at almost every opportunity, it was again dumped by foreign institutional investors (FIIs) in the January-March quarter.

However, trouble started brewing for the lender after the RBI clampdown in 2020, with the central bank suspending HDFC Bank from acquiring new credit card customers due to repeated technological outages. Later, fears of the impact of the reverse merger with the parent entity HDFC Ltd. forced foreign investors to trim their exposure to HDFC Bank and HDFC from the merger announcement through March 2023.

Though the Street largely remains cautiously optimistic about the stock with the highest weightage in the Nifty, overseas investors hold a different view.

FIIs sold over 29 crore shares of HDFC Bank during January-March, worth around Rs 42,594 crore, making it the highest net sell in the fourth quarter.

Adding salt to investors' wounds, in January 2024, the shares of India’s largest private-sector lender tumbled the most in over three years after it reported a weak set of numbers for the December quarter.

Despite income beating consensus expectations, partly due to one-off items, the lender disappointed D-Street on liquidity and deposit metrics. However, in the March quarter, the bank delivered a healthy performance, with NIMs improving 4 bps QoQ.

Even in the face of disappointments, domestic investors haven't lost hope in the sleeping giant. In the same quarter, the DIIs and MF army rushed to its rescue and bought shares worth Rs 62,913 crore, according to PrimeDatabase calculations.

It is among the stocks with the highest bullishness from analysts. Brokerages have 31 strong buy, six buy, and four hold recommendations on the stock, according to data compiled by Trendlyne.

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However, despite the stock market scaling fresh highs, riding on bank stocks, the shares of HDFC Bank continue to trade 12% lower on a year-to-date (YTD) basis. On a one-year basis, the stock is trading 8% lower. The Private Banks Index has also underperformed the Nifty by 14% from a recent relative high in May 2023 and by 30% since a record relative high in March 2019.

What do experts suggest?
Jefferies' Chris Wood mentioned that GREED & fear portfolios have consistently included private sector banks. "These banks have experienced significant outperformance since the end of 3Q02 when GREED & fear launched an Asia ex-Japan long-only portfolio and have undoubtedly been a major driver of that portfolio’s subsequent outperformance over those 22 years."

According to the note, HDFC Bank and ICICI Bank have risen by 4,491% and 3,330%, respectively in US dollar terms on a total-return basis since the end of 3Q02, compared with a 614% gain in the MSCI AC Asia ex-Japan Index and a 3,403% gain in GREED & fear’s Asia ex-Japan long-only portfolio since a record relative high in March 2019.

Still, Wood believes that it is also fair to note that there is a growing narrative, which is probably correct, that the private sector banks have seen their best days but that does not mean the private sector banks are without merit as investments.

Indeed, value-oriented investors are approaching a level of valuation that makes them finally appear interesting, with the best example of this de-rating dynamic HDFC Bank following the indigestion pains created by the merger with HDFC.

HDFC Bank now trades at 1.9x one-year forward price-to-book, down from 3.4x in early 2021, while its market capitalisation has declined by 15% from the peak of Rs 13 trillion at the end of 2023 to Rs 11 trillion.

He notes that HDFC Bank is looking to replace the higher-cost borrowings of HDFC based on the maturity of those funds. This means it will happen over a few years and not be done immediately. In terms of GREED & fear’s India portfolio, it has a 23% weighting in private sector banks, with a 5% weightage to HDFC Bank in the India long-only equity portfolio.

Even market experts like Sanjiv Bhasin and Saurabh Mukherjea have backed the private sector lender.

"All the pessimism and over ownership has more or less plateaued. If you are looking for growth, once CDR and the deposit ratio start to do well, the lion's share of the business will come to HDFC Bank." He added that in the next 2-3 years, you will not get a turn of tide so fast.

"But if you are patient, then you are getting one of the best banks for the best performer in the last 20 years available at a very reasonable valuation, so that according to me is a largecap play," the market veteran added.

PMS fund manager Mukherjea is also not losing sleep over the lender's performance. Instead, he bought more when the stock pulled back.

"All three lenders, Kotak, HDFC Bank, and Bajaj Finance are in an economic upcycle, are well-capitalized, and have long track records of good capital allocation and good asset quality management. It's difficult to ask for more than that while investing in a lender," Mukherjea told ET Now earlier this month.

What else did FIIs ditch?
> FMCG Stocks
2 FMCG stocks that also got no love from overseas investors were ITC and Hindustan Unilever (HUL). Over 28 crore shares worth around Rs 12,142 crore of ITC were ditched by FIIs.

Much like HDFC Bank, domestic investors, and MFs rushed to buy the dip. DIIs bought 22 crore shares worth over Rs 9,600 crore, while MFs were also net buyers to the tune of Rs 10,175 crore (23 crore shares).

Shares of India's most popular meme stock are down 7% YTD and largely flat on a 1-year basis. The company posted a flat profit growth for the quarter ended March at Rs 5,000 crore (down 1%).

On the other hand, over 2 crore HUL shares were sold by FPIs in the last quarter.

> Lenders
Other lenders where FIIs trimmed exposure include, Kotak Mahindra Bank saw outflows worth Rs 7,561 crore in the March quarter.

Interestingly, this comes days before the RBI barred the bank from onboarding new customers through its online as well as mobile banking channels. As of March 31, FIIs held over 74 crore shares of Kotak Bank, down from 78 crore held at the end of December 31, 2023.

Axis Bank also saw outflows to the tune of Rs 3,000 crore.

> Others
Shares of Persistent System faced investor wrath on all fronts. The stock was ditched by FPIs (sold shares worth Rs 7,561 crore), MFs (sold shares worth Rs 7,426 crore) as well as domestic investors (offloaded shares worth Rs 8,273 crore).

Other heavyweights that were sold by FIIs include Larsen and Toubro, Asian Paints, and Maruti Suzuki.

Note: Net Sell has been calculated by multiplying the difference in December and March shareholding by the volume-weighted average closing price during the quarter.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)