HDFC Bank shares lose flavour as FPIs preferring other private lenders

Once most popular among foreign portfolio investors, stock is trading at a discount to peers in private space

HDFC Bank, once the most popular stock among foreign investors, seems to be losing ground. 

The stock had opened for fresh foreign portfolio investor (FPI) buying in June this year, as allotment of employee share options (Esops) created a 140 basis points (bps) headroom in the share.

Three months later, there is still a 90 bps headroom for FPIs in the stock. This comes despite bulk allotment to some FPIs during the recently concluded $2.4-billion qualified institutional placement (QIP).

Analysts said FPIs are preferring other private lender stocks such as IndusInd Bank and even smaller lenders such as Bandhan Bank, as they are witnessing faster pace of growth. This has created a situation where HDFC Bank is now trading at a discount to quite of few of its peers in the private banking space in terms of valuation parameters such as price-to-book value and price-to-earnings multiple. 

However, the price-to-book valuation is still at respectably high levels.

At its Tuesday’s closing share price, for instance, HDFC Bank is trading at 31 times its trailing 12-months earnings and 4.8 times its book value. Its average price-to-book value for five-year and 10-year period stands at 4.4 times and 4.2 times, respectively.

In comparison, IndusInd Bank is trading at five times its book value while newer retail lenders such as Bandhan Bank and AU Small Finance are even expensive at over six-eight times their respective book values.

At a broader level, HDFC Bank shares have marginally underperformed both the Nifty and Nifty Private Bank on a year-to-date (ytd) basis. While HDFC Bank shares have gained 12 per cent, the benchmark Nifty and the private bank index went up 11.5 per cent and 13.7 per cent, respectively. However, in the last three months, the stock has been a laggard. HDFC Bank shares are down 2.1 per cent since June 1, even as the Nifty climbed 10 per cent and Bank Nifty gained 5.4 per cent during the period.

Other private banks have also outperformed HDFC Bank this year, rallying 18-40 per cent. HDFC Bank also ceded its place as the highest weighted stock in Nifty to Reliance Industries on account of this underperformance.

According to Reserve Bank of India (RBI) rules, foreign ownership in a bank cannot exceed 74 per cent. Currently, FPI and depositary receipts hold 73.1 per cent stake in HDFC Bank.

In the past, due to its immense popularity with overseas investors, the 74 per cent limit often remained fully utilised in HDFC Bank. Foreign investors, who wanted to buy the shares, had to either purchase its American Depository Receipts (ADRs) or buy from other FPIs through the ‘6 lac series’ platform (an exclusive trading platform for foreign investors). On both platforms, the stock traded at 4-10 per cent premium to the market price, due to high demand. 

Last time, when the stock opened for fresh FPI buying in February 2017, the demand was so high that the headroom was utilised within a matter of two hours.

“Fresh FPI buying in the HDFC Bank stock has reduced significantly, especially in the last two-three months. Earlier, foreign institutions used to buy the stock at a premium but are now going slow. Expensive valuations and availability of other attractive options are prompting this shift. The smaller private banks still have strong growth potential compared to HDFC Bank on account of lower base,” said an analyst, who works for a foreign brokerage.