Foreign and Indian investors are expected to take the leadership transition at HDFC Bank Ltd in stride, with the lender's American Depositary Receipt (ADR) rising sharply ahead of the disclosure and domestic shares recovering from a 52-week low on Friday.
HDFC Bank’s ADR rose 2.76% to $23.08 apiece on Friday, according to financial news website MarketWatch, a day before the lender informed stock exchanges that managing director and chief executive Sashidhar Jagdishan would step down when his second term ends on 26 October.
An ADR allows global investors to invest in a foreign company without buying its stock in the home country. A US bank purchases the company’s shares in, say, India, and issues receipts against those shares to foreign investors on the New York Stock Exchange.
The domestic stock also recovered from a 52-week low of ₹707 on Friday, settling 1.3% higher at ₹720.30. About half of the gain came during the closing auction session, which is typically dominated by passive funds.
Analysts expect the stock to rise further on Monday as domestic shares catch up with Friday’s ADR gains.
“The fact that the ADR and the share on the domestic market rose a day ahead of the disclosure indicates that the Street anticipated the news,” said Ambareesh Baliga, an independent market analyst.
A mutual fund executive, requesting anonymity, said the absence of a reappointment application suggested that Jagdishan’s exit was imminent.
“Normally, the application for reappointment of an MD and CEO has to be submitted to RBI six months before the incumbent's term ends. In Jagdishan's case that didn't happen, implying that his exit was imminent,” the executive said.
Interestingly, before the ADR closed on Friday, Indian call option sellers reduced open interest at the ₹720 strike call by 4%, driving up its price by 16% to ₹17.1 a share. One contract comprises 650 shares.
“A call seller is bearish and the decision to square off shorts is in anticipation of a likely rally in the underlying share,” said S.K. Joshi, consultant at Khambatta Securities.
Domestic support
The leadership change comes as HDFC Bank has increasingly become a favourite of domestic mutual funds even as foreign portfolio investors (FPIs) have reduced their exposure to the stock.
Mutual fund holdings in HDFC Bank rose to 30.62% in June from 25.61% a year earlier, while FPI holdings fell to 41.83% from 48.84%, according to exchange data.
The shift reflects the bank’s prolonged underperformance.
HDFC Bank, an FPI heavy stock, has underperformed the Nifty over both the past five years and the past year. The Nifty generated an absolute return of 44.72% over five years, compared with a negative 7% return for HDFC Bank. Over the past year, HDFC Bank fell 24.8%, compared with a 1.33% decline in the benchmark.
At 1.84 times book value, the stock trades below ICICI Bank at 2.74 times and Kotak Mahindra Bank at 2.33 times, as of Friday, according to HDFC Securities.
The valuation of the stock at 1.84 times its book value is compelling from a long-term perspective, Baliga said.
Nilesh Shah, managing director at Kotak Mahindra Asset Management Co., also pointed to the bank’s pedigree and depressed valuation.
“HDFC Bank is an established brand name with a good business model,” Shah said. “The valuations de-rated over the last five years due to a variety of factors. A strong leadership is needed to sustain investor interest in the stock.”
HDFC Bank had the highest weighting in the Nifty 50 at 10.27% as of July-end, giving its moves a significant bearing on the index.
High-net-worth investors, meanwhile, had raised ₹3,644 crore from brokers to fund their margin requirements for buying the stock as of Thursday, up from ₹2,381 crore at the beginning of the month. Under the margin trading facility (MTF), brokers can fund up to 70–80% of the margin required to buy a stock.