Introduction

The stock market is a dynamic and interconnected entity, where multiple factors influence the share price of companies. Despite HDFC Bank reporting strong quarterly results, its share price experienced a fall. This article aims to explore the underlying reasons for this fluctuation in the market. We will also discuss the significance of market value, expectations, and the impact of recent mergers on the bank's share price.

Understanding the Market Value of Stocks

The market value of a stock, which is the price quoted on the stock exchange, can often be seen as a fa?ade. It is influenced by various factors, some of which are not entirely accurate reflections of the true value of the company. For instance, Mukesh Ambani, one of the largest shareholding entities, could not sell all his shares at the market price if he wanted to liquidate his entire shareholding. This highlights the artificial nature of stock prices.

On January 15, 2024, our analysis suggested that HDFC Bank’s share price would fall below 1600 in the near future due to technical weakness. The stock’s performance has been increasingly volatile, influenced by market expectations and the delivery of results. Currently, the stock price stands at 1537.5. If it closes below 1528, the trend may become more negative, potentially leading it to 1493 and then to 1433. However, it remains bullish above 1700 and is a strong indicator for investors to hold their positions.

HDFC Bank’s share price drop can be attributed to higher-than-expected market expectations. The bank’s quarterly results, although strong, may not have met the elevated expectations set by market participants, leading to a price adjustment.

Home Loan Sector and HDFC Bank's Strategic Advantage

Interest rates and the home loan sector play a pivotal role in the profitability of banks. The home loan sector is the largest and most lucrative, as it involves substantial ticket sizes, usually offered to high-net-worth individuals or people with strong credit histories and regular income. Thus, it has the lowest risk of becoming non-performing assets (NPAs), making it a highly attractive area for banks.

However, HDFC Bank faced a barrier in the home loan sector due to a unique agreement between HDFC Ltd. and HDFC Bank. According to this agreement, HDFC Bank customers seeking home loans would have to take them from HDFC Ltd., which would pay HDFC Bank a fee. The key issue was that HDFC Ltd., as a Non-Banking Financial Company (NBFC), had limited cash reserves. Consequently, it had to borrow at higher interest rates to provide home loans, driving up the cost for customers.

This arrangement led to a significant loss of customers, as depositors turned to other banks for their home loans. Following the merger, HDFC Bank has been able to provide home loans at much more competitive rates, making it an attractive option for customers. As a result, the home loan portfolio of HDFC Bank has become the largest in India, following State Bank of India (SBI).

While this strategic move has led to increased competition, concerns arise from the fact that capturing a significant market share can limit further growth and innovation. Additionally, the growth rate of the loan industry in India is growing at a CAGR of 10%. This incites fear that the bank may face stagnation in growth if it doesn’t continue to grow at an above-average rate.

Despite these concerns, HDFC Bank’s management has consistently outperformed expectations. They have successfully lowered NPAs, maintained a balance between Retail and Corporate Banking, and achieved a high return on assets. These factors have contributed to the bank’s strong fundamentals and its position in the market.

Conclusion

The recent drop in HDFC Bank’s share price can largely be attributed to market sentiment and unmet expectations, despite strong quarterly results. However, the fundamental performance of the bank remains robust. The merger has placed HDFC Bank in a strategic position, offering new opportunities for growth and innovation. Sensible investors should view this as an attractive buying opportunity.