Fifth Month Running: Mutual Funds Continue to Invest in HDFC Bank

Mutual funds have been aggressively buying shares of HDFC Bank Ltd, the largest lender in India by market valuation. In May alone mutual funds purchased shares worth ₹7,600 crore, marking the fifth consecutive month of buying.

Here’s a breakdown of the monthly purchases:

In May, mutual funds purchased 4.99 crore shares of HDFC Bank. This increased their total holdings in the bank to around 151.69 crore shares up from 146.70 crore shares in April. The value of these holdings rose from ₹2.23 lakh crore to ₹2.32 lakh crore according to ACE Equities.

Leading Buyers and Stakeholders

Among the 41 mutual funds with exposure to HDFC Bank 26 increased their holdings in May while 14 reduced theirs. Quant Mutual Fund led the buying spree with ₹2,669 crore in purchases followed by ICICI Prudential Mutual Fund ₹2,210 crore and Axis Mutual Fund ₹982 crore.

•    SBI Mutual Fund: Largest stakeholder with 36.91 crore shares valued at ₹56,503 crore.
•    ICICI Prudential Mutual Fund: Holds 18.61 crore shares worth ₹28,490 crore.
•    HDFC Mutual Fund: Holds 17.86 crore shares valued at ₹27,337 crore.
•    Other major holders: Nippon India Mutual Fund, UTI Mutual Fund, Kotak Mahindra Mutual Fund and Mirae Asset Mutual Fund.

Stock Performance and Market Sentiment

Despite strong interest from mutual funds, HDFC Bank's stock has underperformed over the last two years mainly due to consistent EPS downgrades and changes in rate cycle dynamics. In 2023, the stock was up just 5% and it is down 3% so far in 2024. The management's no guidance policy has received mixed reactions but analysts believe the low current EPS expectations may signal the end of the downgrade cycle which could be key to the stock's recovery.

BofA Securities maintains a Buy recommendation citing attractive valuations at 1.8-1.9x PB and 13-14x PE based on just below 15% growth and ROEs. The global financial firm expects a strong outlook for the medium term, predicting clearer benefits from mergers starting from FY26 onwards. Positive surprises in deposit growth and NIMs, policy easing visibility and improved foreign investor sentiment could act as short term catalysts.

Analyst Recommendations and Future Outlook

Currently, HDFC Bank has 45 buy ratings and 5 hold ratings with no sell ratings compared to 42 buys and 3 holds a year ago as per Bloomberg.

According to a report from Macquarie, HDFC Bank's portion or representation within the MSCI India index might double during the next rebalancing scheduled for August. This change might result in passive buying of $5.2 billion, equivalent to 281 million shares. Although HDFC Bank narrowly missed the weight increase in the May rebalance, Macquarie expects passive buying due to the expected weight doubling.

UBS analysts predict a more moderate inflow of $3-3.5 billion during the index rebalance, compared to Macquarie's $5.2 billion forecast. UBS also suggested additional buying of $2.5-3 billion from other index tracking funds. Despite the differing views both analyses indicate passive buying potential.

To Summarize

HDFC Bank remains a favored pick among mutual funds and analysts alike despite its recent underperformance. The upcoming MSCI India index rebalance could further boost the stock with passive inflows adding to the optimism surrounding its future performance.