Why HDFC Bank’s Under-performance Is An Opportunity To Buy

In Jan 2014, Motilal Oswal released a report pointing out that HDFC Bank was quoting at the lowest P/E multiple over 11 years. It pointed out that this was a bargain because HDFC Bank was still growing at 25% CAGR, which was amongst the highest growth rates in Nifty stocks.

Since then, HDFC Bank has given a return of 12%. However, the interesting thing is that the stock has still under-performed the Index and its’ peers. For instance, in the last three months and one month respectively, the Bank Nifty has given a return of 17.90% and 6.80% respectively. In the same period, HDFC Bank has given a return of 12.54% and 4.90%. This becomes even more stark when you compare HDFC Bank with its peers IndusInd Bank, AXIS Bank and ICICI Bank. In the 3 month period, the said three banks have given a return of 23.4%, 27.13% and 19.27% respectively as against HDFC Bank’s return of only 12.54%.

Now, the question is why are investors shunning HDFC Bank given that there is no problem with its performance.

The answer is that HDFC Bank’s application for raising overseas shareholding limit to 67.55 percent from 49% has been inordinately delayed by more than a year and it is not known if and when the approval will be granted. Accordingly to a news report, the Government is scrutinising all foreign investments made in the bank. One of the stumbling blocks is whether the investment made by HDFC in HDFC Bank (22%) qualifies as foreign or domestic ownership given that 74% in HDFC is owned by FIIs.

So, this overhang of whether the Government will grant approval or not is playing havoc with investors’ sentiments, making them jittery, and they are keeping their distance from the counter.

But, this is where the opportunity arises for sensible investors who are able to weather the uncertainty and sweat it out. Yogesh Hotwani of IndiaNivesh has pointed out in a report (pdf) that there is no change in the fundamentals of HDFC Bank. On the other hand, the fundamentals are good because there is robust growth in loan book, strong capital adequacy and healthy margins. He also points out that the bank has been successful in maintaining its asset quality consistently with healthy provision coverage despite challenging business environment. He explains that HDFC Bank is currently trading at P/ABV of 4.3x and 3.7x for FY14 and FY15 ABV respectively, which is reasonable given its strong track record. Investors should buy the stock with a target price of Rs 820, he says.

This advice makes sense because once the approval issue is resolved one way or the other, the stock will rebound to make up for lost time.

Speaking for myself, I am acting on this advice. I already have a huge chunk of HDFC Bank in my portfolio (along with IndusInd Bank, Bajaj Finance and Kotak PSU Bank ETF). I intend to keep buying more in a steady and systematic fashion.