Will HDFC Group stocks underperform in near term? | Economic Times

Mumbai: Did quality come at too steep a price? Recent tepid returns on the listed HDFC group portfolio appear to give the impression that the allure might temporarily be fading of the powerhouse that pioneered mortgage lending in the country and created India’s most valuable bank.Investor preference lately for beaten-down value stocks crimped returns for expensive quality shares, such as those from the HDFC group, which had driven the rally in Indian equities prior to the March 2020 blowout. “The dynamics have changed now with investors buying those beaten-down stocks that are fundamentally recovering instead of paying a huge premium to own quality stocks,” said Gaurav Dua, head — capital market strategy, Sharekhan. “HDFC group stocks are seen as safer bets in a dull market, but investors or fund managers have to divert money from these stocks to others that are turning around — such as State Bank of India and ICICI Bank — to outperform the market.”To be sure, the reasons behind stock underperformance might be different at each of the companies.HDFC Bank has faced regulatory curbs due to unresolved technology glitches amid its first change of guard in a quarter century. Weak loan demand and a broader depressed property market, on the other hand, weighed on HDFC. Finally, premium valuations, relative underperformance of investment plans and increased stock supply due to share sales by Standard Life prevented HDFC AMC and HDFC Life, respectively, from matching industry returns. 83967611While HDFC Bank has gained 17% since January 2020 compared with a 29% jump in the Nifty, HDFC, HDFC Life, and HDFC AMC have given returns of 2.77%, 10.47%, and -7.28%, respectively. Separately, shares of unlisted HDB Financial Services declined 39% in the past one year to ₹900 apiece on the platform for trading such stocks.Despite relative underperformance, HDFC Bank currently commands a price to book ratio of 3.25 compared with 2.81 of ICICI Bank. HDFC Life Insurance is trading at price to book of 16 times, a premium of 65% to its nearest peer ICICI Prudential Life Insurance. HDFC AMC price to book is 13 times compared with Nippon India’s 7.3 times. Even HDFC’s book value is almost double that of LIC Housing Finance.“HDFC group’s underperformance, to a large extent, can be attributed to the regulatory overhang that restricted HDFC Bank from accelerating its digital drive and that hit fresh issuances of credit cards,” said Binod Modi, head of strategy, Reliance Securities. “This resulted in its credit card market share contracting, while the valuation premium of most group companies has always been relatively high, compared with peers.”Indeed, HDFC group stocks outperformed in a weak broader market. Between 2008 and 2010, HDFC and HDFC Bank gained more than 30% compared with a 3% rise in Nifty.