HDFC Bank: Mutual Funds Bet Big On India’s Largest Lender For The 5th Straight Month; Brokerages Bullish

The shares of HDFC Bank, the country's largest lender by market value, have garnered significant attention from market participants, notably mutual funds and brokerages. Despite recent underperformance, there's a prevailing bullish sentiment driven by consistent mutual fund acquisitions and promising future outlooks.

Mutual funds purchased shares worth Rs 7,600 crore in May alone, marking the fifth consecutive month of significant buying activity. This sustained buying spree shows mutual funds' robust belief in HDFC Bank's long-term potential.

January saw the highest purchase at Rs 12,884 crore, followed by a steady influx of investments: Rs 8,432 crore in February, Rs 4,600 crore in March, and Rs 1,890 crore in April. In May, mutual funds acquired approximately 4.99 crore shares, increasing their total holdings to 151.69 crore shares, up from 146.70 crore in April. The value of these holdings surged to Rs 2.32 lakh crore from Rs 2.23 lakh crore within a month, based on ACE Equities data.

Out of the 41 mutual funds invested in HDFC Bank, 26 increased their stakes in May, with Quant Mutual Fund leading the pack by purchasing shares worth Rs 2,669 crore. ICICI Prudential Mutual Fund and Axis Mutual Fund followed with investments of Rs 2,210 crore and Rs 982 crore, respectively.

SBI Mutual Fund remains the largest mutual fund stakeholder, holding 36.91 crore shares valued at Rs 56,503 crore. ICICI Prudential Mutual Fund and HDFC Mutual Fund hold stakes as well, with 18.61 crore and 17.86 crore shares worth Rs 28,490 crore and Rs 27,337 crore, respectively. Other holders include UTI Mutual Fund, Nippon India Mutual Fund, Kotak Mahindra Mutual Fund, and Mirae Asset Mutual Fund.

Despite the bullish stance of mutual funds, HDFC Bank's stock has underperformed over the past two years. This lacklustre performance is attributed to consistent EPS downgrades stemming from guidance misses and changing rate cycle dynamics. The bank's management has adopted a 'no guidance' policy, eliciting mixed reactions from investors amid macroeconomic uncertainties. In 2023, the stock rose by only 5%, and in 2024, it has dipped by 3% so far.

However, analysts believe that the current low EPS expectations could mark the end of the downgrade cycle, which is crucial for the stock's recovery. BofA Securities reiterated its 'Buy' recommendation, emphasizing attractive valuations at 1.8-1.9x PB and 13-14x PE, which incorporate just below 15% growth and ROEs.

HDFC Bank's medium-term outlook appears robust, with anticipated clearer merger synergies from FY26 onwards. Short-term catalysts for a potential re-rating include positive surprises in deposit growth and Net Interest Margins (NIMs), policy easing visibility, and improved foreign investor sentiment and flows into India.

Currently, the bank boasts 45 buy ratings and 5 hold ratings, with no sell ratings, compared to 42 buys and 3 holds a year ago, according to Bloomberg.

A recent Macquarie note highlighted the potential increase in HDFC Bank's weight in the upcoming MSCI India index rebalance in August. Macquarie projected passive buying worth $5.2 billion, equivalent to 281 million shares, should HDFC Bank's MSCI weightage double. The note pointed out that HDFC Bank narrowly missed the weight increase in the May rebalance but expected it to secure this in August.

Contrarily, UBS analysts predicted a more moderate increase, estimating inflows of $3-3.5 billion. They also suggested an additional $2.5-3 billion from other index-tracking funds, though they emphasized that a gradual increase might render this inclusion less significant. UBS maintained a buy rating with a target price of Rs 1,900 per share.

HDFC Bank is currently positioned fourth in the MSCI India Index with a weight of 3.89%. A potential doubling of this weight could effectively address the technical overhang on the stock caused by its merger.

The ongoing mutual fund acquisitions and the anticipated index rebalance reflect a strong vote of confidence in HDFC Bank's future prospects. Despite recent underperformance, the bank's solid fundamentals and attractive valuations continue to attract significant investments from institutional players. As the market awaits the MSCI India index rebalance in August, all eyes remain on HDFC Bank, with expectations of passive inflows potentially driving the stock higher.