HDFC Bank hits record high on fund buying

MUMBAI : HDFC Bank Ltd surged to a record 1,757.50 in early trading on Monday, supported by institutional buying following its merger with mortgage lender parent Housing Development Finance Corp. (HDFC) Ltd. But subsequent profit booking by some investors eroded gains. The stock climbed as much as 3.3% in intraday trading before settling with a modest 1% gain at 1,719.8.

The market value of HDFC Bank hit a record high of 9.62 trillion. The buying was “most likely” led by funds that have HDFC Bank in their portfolios and not HDFC, according to U.R. Bhat, the director and co-founder of Alphaniti Fintech Pvt. Ltd, which provides fund-based investment advisory services.

“As the weight of HDFC Bank increases post the merger, such funds (without HDFC) could have started buying more of the bank,” Bhat said. “The buying was also induced by the overhang of uncertainty surrounding the merger out of the way effective 1 July.”

Bhat believes that the rally witnessed in the bank “has more legs” but refrained from citing any levels for the stock.

Rajesh Palviya, head of research at Axis Securities, said the imminent weighting rise was “spurring” fresh buying among some funds, extending the bank rally to 1,840 in the near term.

The buying was evident in HDFC Bank’s delivery volume on Monday, totalling 11.5 million, 2.6 times the average daily volume of 4.4 million shares in the past year.

To be sure, domestic mutual funds (MFs) could witness collective selling of around 5,000 crore worth of the merged bank as regulatory rules forbid MFs from holding over 10% in stock in any scheme. This rule would make the sale compulsory within 30 days from either the date of the effective merger on 1 July or after the record date of 13 July, with the weight of HDFC Bank bound to increase in the Nifty index.

“Those MF schemes overweight HDFC and HDFC Bank will need to pare their exposure as the weight of the merged entity increases beyond the 10% threshold,” said a fund manager on condition of anonymity.

While Nuvama Institutional Equities expects $150-200 million outflows from passive trackers of the MSCI India index on potential index adjustment, it expects a “potential weight-up inflow of around $1.3 billion odd/63 million shares of the merged entity” by index provider FTSE at its forthcoming review likely on 23 September.

While the weight of the merged entity could compete with Reliance Industries Ltd’s weight, its market cap would be below that of RIL’s, Bhat added.

The market capitalization would be higher than that of Tata Consultancy Services (TCS) Ltd. On Monday, the market capitalization of TCS was 11.97 trillion against HDFC Bank’s 9.62 trillion and HDFC’s 5.3 trillion. RIL’s market capitalization was 17.67 trillion.

While HDFC Bank hit a record high, HDFC hit a fresh 52-week high of 2,927.40.

Foreign brokerage Morgan Stanley, which has a one-year price target of 2,110 on HDFC Bank, said, “HDFC Bank trades at 16X one-year forward EPS [earnings per share], ~20% below the 15-year mean. Strong trailing investments and cyclical tailwinds (benign asset quality and improving real deposit rates) will help it navigate merger challenges better and return to 17-18% EPS growth after Year 1. Resume at OW (overweight).”

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Updated: 03 Jul 2023, 11:34 PM IST

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