Why Foreign Investors Are Turning Their Back On HDFC Bank

At a time when the entire market is going through a phase of correction, foreign portfolio investors (FPI) seem to be shying away from a major Indian stock which was once their favourite—HDFC Bank. 

Numbers reveal that the jittery FPIs have been reducing their stake in the country's largest private lender. At the end of the June quarter, they had cut their stake down to 32.31 per cent from 35.61 per cent in the previous quarter, shows data from Ace Equity. The maximum permissible foreign holding in the bank is 74 per cent, according to the Reserve Bank of India’s rules. 

Data also indicates a downward drift with a steady dip in the FPI’s stake in HDFC Bank—from 38.23 per cent stake at the end of the September quarter last year to 37.37 per cent stake in the December quarter. The trend seems to have continued this year as well.  

This also comes at a time when the equities across the board are going through turbulent times as the benchmark Nifty 50 index has corrected 8.15 per cent or 1,415 points so far this year on the back of drying liquidity, rising inflation and spike in interest rates globally. The foreign portfolio investors have sold shares worth Rs 2.25 lakh crore this year as compared with the net inflow of Rs 25,752 crore in 2021 and massive inflow of Rs 1.7 lakh crore in 2020.

So, why has the once-loved HDFC Bank become the target of FIIs distrust of late?

The latest dip can be traced back to the merger deal between HDFC and HDFC Bank announced on April 4 this year. Touted as the biggest transaction in India's corporate history, HDFC Bank agreed to take over the biggest domestic mortgage lender in a deal valued at about $40 billion, creating a financial services titan. 

Earlier this month, HDFC Bank announced that it had received the RBI’s nod for the proposal of its merger proposal with its parent HDFC Ltd. However, the merger proposal remains subject to various statutory and regulatory approvals, including that from the Competition Commission of India, National Company Law Tribunal, other applicable authorities and the respective shareholders and creditors of the companies, the banking major had said. 

But since April 4, HDFC Bank has corrected 10 per cent to close at Rs 1,351 on BSE on July 14. 

After the deal was announced shares of HDFC rallied as much as 16.5 per cent on the BSE, the most in nearly two decades, data from BSE showed after its board approved the merger with the country's largest private lender HDFC Bank. Meanwhile, HDFC Bank rallied the most since March 25, 2020 on that day.

However, the stock witnessed a correction after the deal announcement as market participants did not understand the nitty-gritty of the deal. Mergers take time for synergies to set in and profitability to boost it and people thought it will happen fast. To get merged itself will take one year and after merger their cultures has to match and they have to eliminate common expenses, analysts said.

FIIs had high stake in HDFC Bank and now when the overall market is under pressure HDFC Bank is witnessing selling pressure as FIIs had high stake in highly liquid stocks like HDFC Bank, explains AK Prabhakar, head of research at IDBI Capital.

He advises buying HDFC Bank at current levels as the stock has become attractive at the target of Rs 2,020.