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Foreign shareholding in HDFC Bank for the quarter ended September stood at 59.25 per cent, leading to a foreign room of 20.08 per cent, according to latest shareholding pattern available with the NSE.
Foreign room is the proportion of shares still available to foreign investors relative to the maximum allowed. The foreign investment limit in privately held banks is 74 per cent.
The current foreign shareholding is lower than at the time of the merger with HDFC Ltd, when it was 60.36 per cent, resulting in a foreign room of 18.43 per cent. This is due to the lower foreign shareholding in the mortgage lender.
The foreign room has steadily increased over the past eight quarters and was at 10.5 per cent at the end of December 2021, according to data collated by analyst Brian Freitas of Periscope Analytics, who publishes on Smartkarma.
Post-merger, foreign shareholding has dropped even as mutual funds, the Life Insurance Corporation of India, retail and HNI investors, and non-resident Indians have increased their stake.
The much-talked-about selloff from local mutual funds due to SEBI regulations that prohibit any mutual fund scheme (except ETFs and sector/thematic funds) from holding more than 10 per cent of their AUM in a single stock did not materialise, said Freitas. The weightage of HDFC Bank in the Nifty 50 at the end of September stood at 13.3 per cent.
After trading in a range for nearly a year, HDFC Bank shares have slid 7.1 per cent in the last month to ₹1,516. Expectations of a drop in net interest margins and higher non-performing assets have led to HDFC Bank underperforming peers and the local indices, according to Freitas.
There is no flow expected in the local indices due to the increased foreign room for the stock since it is already included with a float of nearly 100 per cent.
One global index provider has announced that HDFC Bank’s weight in its indices will be increased in a phased manner. That will require passive index trackers to buy around 34.1 million shares of HDFC Bank in December and then the same quantity again in March 2024, said Freitas.
The other major global index provider will increase HDFC Bank’s weight in its indices once the foreign room crosses 25 per cent. For the foreign room to reach 25 per cent, foreign investors will need to sell around 275 million shares of HDFC Bank, according to Freitas.
Once the foreign selling is done and the foreign room has reached 25 per cent, the increased weight in the indices will require passive trackers to buy around 265 million shares of HDFC Bank.
“We do not expect the foreign room to cross 25 per cent any time soon, barring some news that changes the fundamentals of the company significantly. That would lead to a sell-off in the stock, and the subsequent passive buying could provide some support,” Freitas said.
Factoring in incremental net worth adjustments for the bank, Emkay Global Financial Services has lowered its book value of equity per share estimates for FY24–26E by 1-2 per cent. However, the brokerage expects the bank’s RoA/RoE to improve from 1.9 per cent/ 15.8 per cent in FY24E (merged) to about 2 per cent and 17.3 per cent by FY26E, benefiting from better growth/margins and fees as merger synergies kick in.
The brokerage has a target price of ₹2,100, an upside of 38.5 per cent from current levels, given the stable management, better return profile, and valuation.
Prabhudas Lilladher has a buy rating on HDFC Bank with a target price of ₹2,025 given that negatives are priced in and the core earnings outlook is better.
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