HDFC Bank: Brokerages Bullish as FII Stake Dips Below 55%, Eyes MSCI Boost

On July 3, HDFC Bank shares jumped 3.5%, reaching a record high of ₹1,791 per share. This rise followed a 4% rally in its American Depository Receipts (ADRs), which climbed to $66.9 apiece overnight after the release of June shareholding data. With foreign investors' stake dropping below 55% in the June quarter, analysts predict that the bank's weighting in the MSCI Standard index could potentially double in the upcoming reshuffle.

Over the past three months, the stock of India's largest private sector lender has surged by over 16%, outpacing the benchmark Nifty 50 index, which saw a 7% increase. However, despite this recent performance, HDFC Bank has underperformed year-to-date, with a modest rise of just 1.7%.

BSE data indicates that as of the end of June 2024, foreign institutional investor (FII) ownership in HDFC Bank was at 54.8%. Since this level is below the 55% threshold, it allows for additional MSCI inflows during the August 2024 rebalancing. The updated data expands the 'foreign room' in the stock to over 25%, meeting a crucial condition for the index provider to include a stock at its full market-cap weight.

Analysts predict that the inclusion could attract up to $6.5 billion in MSCI inflows for HDFC Bank. UBS estimates future buying between $3 billion and $6.5 billion, a factor partly contributing to the recent rally. The brokerage firm maintains a 'Buy' rating on HDFC Bank, setting a target price of ₹1,900 per share.

Jefferies analysts indicate that the reduction in FII stake might enable MSCI to increase the foreign inclusion factor threshold from 50% to 100%, potentially acting as a positive short-term catalyst for the stock. In the medium term, robust deposit growth and improving margins are anticipated to be key drivers. Jefferies also maintained a 'Buy' rating on HDFC Bank, with a target price of ₹1,880 per share.

Currently, HDFC Bank holds the fourth position in the MSCI India Index, with a weight of 3.89%. India's weight in the MSCI Emerging Markets (EM) Index is 19.2%, and it is anticipated to exceed 20% in the August rebalance.

The review period for the August adjustment will occur from June 18 to 31, with the official announcement scheduled for August 13 and the adjustment set to take place on August 30, 2024. 

HDFC Bank stock may be ending its prolonged period of underperformance as the expected increase in its MSCI weight will reduce the substantial overweight position held by foreign investors following the merger, thereby alleviating the supply overhang in the stock.

Momentum in HDFC Bank stock has already been on the rise. Mutual funds have been increasing their stakes in the bank, attracted by its attractive valuations. In May, mutual funds purchased shares worth ₹7,600 crore, marking the fifth consecutive month of buying HDFC Bank shares. This trend persisted into June. Recent ownership data revealed that six mutual funds now hold shares valued at ₹163 crore, up from ₹152 crore in March 2024.

Shares of HDFC Bank have increased by approximately 10% over the past month, following nearly a year of underperformance. Over the last year, the stock has remained relatively flat with a minimal gain of 0.48%, whereas the Nifty Bank index has risen by 15.52%.