Mutual Funds Bet Big On HDFC Bank, Buy Shares Worth Rs 7,000 Crore In June Amidst Foreign Investor Caution

Mutual funds have invested heavily in HDFC Bank, the largest bank in India by market capitalization, during the first half of 2024. This influx of domestic institutional investment contrasts sharply with the slight retreat by foreign investors, who have marginally cut down their exposure to the bank.

Over the first six months of 2024, mutual funds bought HDFC Bank shares worth over Rs 42,000 crore. This continuous buying spree peaked in June, with mutual funds acquiring 4.09 crore shares valued at Rs 6,887 crore. This marked the sixth consecutive month of investments in HDFC Bank.

Over the first half of 2024, mutual funds demonstrated a consistent pattern of investments in HDFC Bank, with the monthly purchases being Rs 12,884 crore in January, Rs 8,432 crore in February, Rs 4,600 crore in March, Rs 1,886 crore in April, Rs 7,600 crore in May, and Rs 6,887 crore in June.

Among the mutual funds, ICICI Prudential MF emerged as the largest buyer, purchasing shares worth around Rs 10,750 crore. Following closely were Quant Mutual Fund and HDFC Mutual Fund with investments of approximately Rs 7,754 crore and Rs 5,683 crore, respectively. Other notable buyers included Kotak MF and Nippon India MF, which bought shares worth Rs 4,917 crore and Rs 4,765 crore, respectively.

Despite the robust buying by mutual funds, foreign investors have marginally reduced their holdings in HDFC Bank. As of the June 2024 quarter, foreign ownership in the bank stands at 54.83%. This figure is below MSCI's 55.5% threshold required for a weightage increase, creating over 25% 'foreign room' in the stock, which is necessary for inclusion at its full market-cap weight.

HDFC Bank currently holds a weight of 3.8% in the MSCI EM index. The reduction in foreign ownership opens the door for potential inflows, contingent on MSCI's decision regarding the weight increase expected on August 13. According to Nuvama Research, if HDFC Bank qualifies for the weightage increase, it could attract $3-4 billion in inflows by the end of August.

Despite the aggressive buying by mutual funds, HDFC Bank's shares have not reflected the same optimism, having declined nearly 6% in the first half of 2024. This follows a 5% drop in 2023, attributed to weaker-than-expected earnings. The bank's stock has underperformed over the past two years, even as Indian equities have rallied. This underperformance is primarily due to consistent downgrades in earnings per share (EPS) projections, stemming from missed guidance and changes in the interest rate cycle.

HDFC Bank's management has adopted a 'no guidance' policy, which has elicited mixed reactions from analysts and investors. While some view it as a prudent approach amidst macroeconomic uncertainties, others believe it contributes to the stock's volatility. For FY24, the bank reported a lower net interest margin (NIM) of 3.4%, while the credit deposit ratio stood at 105%. Analysts suggest that the FY25 EPS expectations are sufficiently conservative to potentially halt the downgrade cycle, which could be pivotal for the stock's recovery.

The mixed performance and uncertain outlook have led to divergent views among financial analysts. Recently, BofA downgraded HDFC Bank's stock from 'buy' to 'neutral,' revising the target price from Rs 1,850 to Rs 1,830 per share. BofA cited a narrow risk-reward profile over the next 12 months as a key reason for the downgrade. They also highlighted concerns about a shallow rate cut cycle, which could delay HDFC Bank's NIM recovery.

The contrast between the heavy investments by mutual funds and the cautious stance of foreign investors towards HDFC Bank shows the dynamics influencing the bank's stock. While domestic institutional investors are betting on a turnaround, the subdued performance and cautious earnings outlook continue to weigh on the stock's performance. The upcoming MSCI decision and potential inflows could serve as significant catalysts for the stock.