Building up a stake in HDFC Bank could bring a windfall

Investors looking for safer bets on Dalal Street could consider HDFC Bank but they would be better off putting money in the stock in installments over the next few months. This is because the stock, despite cheaper valuations compared to its historical levels, could linger at these levels in the absence of visible triggers, said analysts.

“Investors looking for quality and safety of margin when markets are at all-time highs could park funds in the stock as the long-term outlook is bullish for the stock,” said Rajesh Palviya, senior vice president research – technical & derivatives, Axis Securities.

Investors have cut their exposure to the stock in recent times on account of the pressure on growth and profitability after HDFC merged with the bank in July 2023.

HDFC shares, which closed at ₹1,595.6 on Friday, have fallen 6% so far in 2024 and are down 0.5% in the past year. The Bank Nifty, which closed at 50,002 on Friday, is up 3.7% since January and 14.6% in the past year. ICICI Bank is up 10.6% so far this year and nearly 20% in the past year.

This underperformance may continue for a while till the earnings outlook improves. But what is keeping analysts’ interest in the stock alive is the cheaper valuations in the wake of its weak show on the bourses.”The main driver for investor interest in HDFC Bank is that the valuations are on a cheaper side, trading at a discount of 20-30% to historical valuations,” said Ajit Kabi, banking analyst, LKP Securities.”Most of the negatives and pain points of the bank seem to be out in the open now. With better clarity than before, the stock should see renewed interest among investors,” said Shrikant Chouhan, head of research at Kotak Securities. “The stock is at inexpensive levels, but for a sharp re-rating, consistent performance on operating metrics would be keenly observed.”While HDFC Bank has been among the top picks of mutual funds of late, the absence of big foreign purchases has kept a lid on the stock price, said analysts.

Build a Stake in HDFC Bank to Reap Breakout Gains

In the March quarter, HDFC Bank missed out on the prospect of fresh foreign purchases of its stock by a whisker. Overseas investors’ stake in HDFC Bank fell in the March quarter but this fell short of index provider MSCI’s requirements to increase the stock’s weight on the index.

Analysts said that FII investment is capped at certain levels and unless there is a cushion, no new positions are likely to be added. However, if existing FII positions are sold off, then further buying by FIIs can take place which could lead to an increase in weightage for the stock in the MSCI Index resulting in inflows in HDFC Bank.

The foreign holding in HDFC Bank stood at 55.54% as on March 31 against the requirement of 55.50% for MSCI to increase the weight An increase in a stock’s weight on MSCI indices would result in global Exchange Traded Funds (ETFs), whose portfolios mimic these indices, making fresh purchases.

Palviya said that the charts indicate a bullish near-term outlook and there could be some recovery in the stocks with short covering expected over `1,600 levels. Kabi said investors could buy the stock at current levels as HDFC Bank could catch up with the broader market soon.