Foreign investors pay top dollar for HDFC Bank

HDFC Bank branch office in Mumbai.
Foreign investors on Friday lapped shares of HDFC Bank after the Reserve Bank of India (RBI) lifted foreign portfolio investors' (FPIs’) buying restrictions on the stock. The scrip surged 9.5 per cent, the biggest intra-day gain in three years, to Rs 1,450 as FPIs scrambled to buy in the limited window.

The share price then retreated, to end only 3.7 per cent up at Rs 1,377, after RBI reimposed the ban once the 74 per cent FPI investment ceiling was hit. According to the policy, foreign investment in Indian banks is capped at 74 per cent.

HDFC Bank’s consistent record has made the stock a darling of foreign investors, who make full use of their investment limit. In fact, the American Depository Receipts (ADRs) of HDFC Bank often traded at a 10-12 per cent premium to the domestic shares, due to lack of FPI room in the home market.

“Over the past week, the ADR was trading at a 10 per cent premium to the domestic market. Also, the stock commands a healthy premium of up to 12 per cent in FPI-to-FPI trades. That overseas investor were willing to pay top dollar was clear as we saw a sharp surge after RBI lifted the restriction,” said an analyst with a foreign brokerage, requesting not to be named.

Shares worth Rs 15,000 crore of HDFC Bank were traded on the National Stock Exchange (NSE) and the BSE on Friday. Analysts say the investment limit got freed in the stock due to the conversion of Employee Stock Ownership Plans (ESOPs).

Market players said domestic institutional investors and savvy individual investors tried to sell the stock during the up-moved. Within hours, RBI stated the 74 per cent investment cap had been reached and barred further purchase by FPIs. 

From provisional data, FPIs bought shares worth Rs 8,043 crore on Friday, while domestic investors sold shares worth Rs 5,632 crore in the overall market.

And, as the bank has the biggest weighting in the benchmark indices, the 9.5 per cent surge in the stock saw the BSE's benchmark Sensex climb 425 points or 1.5 per cent to 28726.26 in intra-day trade. The NSE's Nifty rose 118 points or 1.35 per cent to 8,896.45, close to its record high. Both, however, gave up these gains to end only 0.5 per cent higher as the rally lost steam.

The bank still ended as the second-most valuable stock, with a market capitalisation of Rs 352,314 crore, overtaking Reliance Industries' Rs 348,829 crore.

FPIs apart, investors across categories are enthused by the stock, as it has delivered market-beating returns year after year. The bank has grown its net profit by 20-30 per cent annually in the past five years. Its strong presence in the retail (to individuals) lending segment, coupled with a formidable liability franchise, has steered such growth. It has also consistently increased its market share, thanks to the sustained focus on expanding its distribution and improving its digital channels.

The ability to keep a stringent check on asset quality (gross non-performing assets ratio historically have been below 1.3 per cent) is another factor which attracts investors.

Some analysts feel replicating this 20-30 per cent annual growth could be a challenge in the current operating environment.

Siddharth Purohit of Angel Broking says, “In the past two-quarters, we have seen the bank’s earnings moderate from its historical peak. So, for the stock to replicate the past performance, earnings will have to pick up.”

Suresh Ganapathy of Macquarie Capital is more bullish. “The return on equity has consistently been around 20 per cent and this is reflecting in their loan growth as well. I expect the stock to deliver 15-20 per cent gain in the next one year,” he says.

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