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Business News/ Markets / Stock Markets/  Are HDFC Bank shares gearing for an ITC moment?
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Are HDFC Bank shares gearing for an ITC moment?

ITC share price has given105% return in the last 19 months while HDFC Bank shares have faced challenges post-merger, but still have positive factors such as a low NPA ratio, say experts

Stock to watch: Experts believe HDFC Bank may need time to come out of the base building mode, but it is still considered a strong investment. (Bloomberg)Premium
Stock to watch: Experts believe HDFC Bank may need time to come out of the base building mode, but it is still considered a strong investment. (Bloomberg)

Stocks to watch: ITC share price remained in 190 to 250 apiece range from 190 to 220 per share levls during November 2020 to February 2022. However, after coming out of this base building moce, ITC share price has ascended to the tune 450 apiece levels in last 19 months, delivering around 105 per cent return in this time. So, ITC shares are one of the multibagger stocks that Indian stock market has delivered in recent years.

Looking at HDFC Bank shares, this Nifty heavy weight has been trading in 1500 to 1700 range for near one year, even though market is highly bullish on HDFC Bank shares in this period, especially after HDFC Bank and HDFC merger. Experts believe that fundamentals of the bank have remained strong throughout this period and post-merger, it has managed to improve its CASA, which may further improve. apart from this, HDFC Bank's NPA ratio is one of the lowest among Indian banks, which is attracting foreign institutional investors (FIIs). 

However, they said that lending business of the company is under pressure after Indian government introduced bad loan regime to address the NPA issue of PSU banks. Now, big PSU banks like State Bank of India (SBI), Bank of Baroda (BoB), Canara Bank, Punjab National Bank (PNB), etc. are giving tough challenge to HDFC Bank's lending business. Apart from this, HDFC Bank will have to maintain is ALM (Asset Liability Management) post-HDFC Bank and HDFC merger. 

So, it may take some time for the HDFC Bank shares to come out of the base building mode, but once it picks momentume, there can be sharp upside movement in this Nifty 50 stock. Till then, HDFC Bank shares can be termed as gearing for an ITc moment.

Challenges for HDFC Bank

Speaking on the challenges that HDFC Bank is facing post-merger, Sandeep Pandey, Former Deputy Vice President at HDFC Bank said, "ITC and HDFC Bank are two different kinds of companies. ITC share price was under base building mode due to long-term lockdown impact whereas HDFC Bank has challenges on the management front. After merger with HDFC Ltd, its total number of departments have surged around four times. Its lending business has come under pressure due to big PSU banks like SBI, BoB, PNB and Canara Bank are competing against private lenders in a efficient manner. PSU banks have all of a sudden become cash rich after Government of India introduced ban loan initiative to counter NPA problems of state-owned banks. So, in short to medium term, PSU banks are expected to outperform private bank shares including HDFC Bank."

"Coming back to HDFC Bank, there are some big positives that a long term investor can't afford to miss out. HDFC Bank's NPA ratio is one of the lowest among Indian banks, which is attracting FIIs. It has been able to maintain its ALM post-merger and we need to remain vigilant about the banks performance on this parameter in enar term," Sandeep Pandey said.

HDFC Bank vs ITC

Speaking on HDFC Bank shares, Vaibhav Vidwani, Research Analyst at Bonanza Portfolio said, “On 1st April 2022 merger news of HDFC Bank and HDFC Ltd. came in market on that day HDFC Bank touched the level of 1700 after that the bank was not able to sustain on that level. The boards of the two companies approved the merger on 30th June 23 and HDFC Bank was added to the MSCI index on July 13, 2023 after the bank completed a $40 billion merger with HDFC Ltd. These all things showcase strength and growth potential of the Bank. Despite all of the above factors share price of HDFC bank is reluctant to break the high of 1700."

Bonanza Portfolio expert said that in analyst meet post-merger HDFC Bank said that the net interest margin (NIM) will decline and possibly fall by 25 bps for FY24E. This is due to the combined impact of an increased cash reserve ratio, surplus liquidity and increase in non-performing loans due to nonindividual loan portfolio of HDFC Ltd., which can act as barrier to break resistance of 1700 in the upcoming months. In the recent rally also, HDFC Bank failed to attract investors. Investors normally looks for companies with attractive valuation and growth potential. HDFC Bank has both of these qualities.

On why ITC shares turned out showstopper on Dalal Street in last one and half year, Vaibhav Vidwani said, "ITC witnessed severe disruption in its business across segments due to Covid Restrictions and less mobility. The year was filled with fluctuating demand levels creating an environment of risk and uncertainty. The changing consumer preferences and shift towards "contactless shopping" were in an uptrend. ITC remained proactively engaged with ecommerce platforms and aligned supply chains to deliver the right SKUs and service emergent demand in an efficient manner. The Cigarette business saw a gradual recovery in the second half, due to ease in restrictions, but the risk of illegal availability of smuggled Cigarettes remained to be a key challenge which had already witnessed significant erosion of volumes. After a relatively subdued first half, revenue in the second half of FY22 witnessed double-digit growth in the FMCG business."

Highlighting the reasons that has dragged HDFC Bank shares, Harish Menon, Co-founder and head of Investments and product research at House of Alpha said, "Typically, the primary objective of a merger between two business entities is to foster overall value creation. However, the acquisition of HDFC—a non-banking financial institution—by its subsidiary, HDFC Bank, has triggered a series of short-term complications. These include an increase in the latter's cost of borrowing and a decline in the net interest margin (NIM), all occurring without substantial synergy benefits. Additionally, this merger does not offer any advantages in terms of regulatory arbitrage."

Menon said that these factors have exerted downward pressure on the stock price. Whether the augmented scale of the merged entity can yield economies of scale benefits remains contingent upon various factors and will be the main trigger of any breakout of a long term range.

Will HDFC Bank shares give ITC moment?

Stock market experts said that HDFC Bank may remain in base building mode for short to medium term as it will take time for the private lender to bring its all departments in order post-merger. However, they maintained that "HDFC Bank is too big to fail' and hence HDFC Bank shareholders should hold the stock as it may give IT moment once it comes out of the base building mode. They also advised fresh investors to look at HDFC Bank shares provided they have a long term time horizon.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Asit Manohar
Chief Content Producer at Live Mint Digital Team
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Published: 23 Sep 2023, 10:33 AM IST
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