4,491% return by HDFC Bank, underperforming FPIs & India overweight - Jefferies views

Do you know 36 per cent of direct retail money is concentrated in stocks below the top-100 stocks? This compares to 20 per cent holding for foreign portfolio investors. Retail investments in the equity market, defined as direct participation and discretionary mutual funds (ex-SIPs), were 1.5 times the Systematic Investment Plan (SIP) inflows for the first four months of this calendar year. Besides, purchases by individuals saw a sevenfold jump in “active investors” against pre-Covid levels, Jefferies said in its GREED & fear note.

FPI underperformance, midcap stocks

In contrast, foreigners have sold a net $4.7 billion worth of Indian stocks so far this quarter and $3.3 billion year-to-date.

"This is the context where more expensive mid-caps have continued to outperform blue chips with mid-caps accounting for about 60 per cent of the inflows but only 30 per cent of market capitalisation," it said.

Jefferies said foreigners’ portfolios have been underperforming as two prominent high-profile sectors traditionally owned by foreigners and historically accounting for a large share of the Nifty -- private sector banks and IT services, have underperformed in the recent past.

Jefferies said it never tended to own the IT services companies in its portfolio but has always owned the private sector banks.

The Nifty Private Banks index has underperformed the Nifty by 14 per cent from a recent relative high in May 2023 and by 30 per cent since a record relative high in March 2019. While the Nifty IT Index has underperformed the Nifty by 15 per cent since mid-February and by 34 per cent since the relative high in late December 2021.

China & India overweight

Jefferies said if the China trade remains the current focus in Asia, the interesting point in India is that dedicated emerging market foreign investors may no longer be overweight on the domestic stock market in aggregate, given the combination of continuing India outperformance until of late and a market driven by continuing strong domestic flows.

Stellar returns: ICICI, HDFC Bank
Private banks have enjoyed monumental outperformance since the end of Q32002 when Jefferies' first launched an Asia ex-Japan long-only portfolio and have been a major driver of that portfolio’s subsequent outperformance over that 22-year period.

"To cite two prominent examples, HDFC Bank Ltd and ICICI Bank Ltd have risen by 4,491% and 3,330% respectively in US dollar terms on a total-return basis since the end of 3Q02, compared with a 614% gain in the MSCI AC Asia ex-Japan Index and a 3,403% gain in GREED & fear’s Asia ex-Japan long-only portfolio," it said.

Jefferies said there is a growing narrative that the private sector banks have seen their best days. This is partly because the best customers have already been acquired while public sector banks, which still account for 61 per cent of deposits, have become more competitive helped by Narendra Modi’s structural reforms such as the Insolvency and Bankruptcy Act of 2016.

Private bank stocks as investments
Still that does not mean the private sector banks are without merit as investments, Jefferies said.

"Indeed for value-orientated investors they are approaching a level of valuation which makes them finally appear interesting, with the best example of this de-rating dynamic HDFC Bank following the indigestion pains created by the merger with
HDFC, completed in July 2023, where HDFC Bank has to replace the wholesale funding of HDFC with retail deposits," Jefferies said.

Jefferies said it has a 23 per cent weighting in private sector banks. The stocks have been the clear laggard in a Jefferies' portfolio because of its exposure to 'hot' sectors such as real estate, energy and capex plays in line with the continuing positive structural view on India’s domestic demand cycle.

HDFC Bank correction
Jefferies said HDFC Bank now trades at 1.9 times one-year forward price-to-book, down from 3.4 times in early 2021, while its market capitalisation has declined by 15 per cent from the peak of Rs 13 lakh crore at the end of 2023 to Rs 11 lakh crore.

"It should be noted that HDFC Bank is looking to replace the higher cost borrowings of HDFC based on the maturity of those funds. This means it will happen over a few years and not be done immediately," Jefferies said.