HDFC Bank slides 3% as Aditya Puri sells 95% of his stake in the bank

Shares of private lender HDFC Bank slipped 3.4 per cent to Rs 1,081 on the BSE on Monday after its managing director and chief executive officer Aditya Puri sold off nearly 95 per cent of his stake in the bank valued at Rs 842.7 crore.

Puri held 0.14 per cent stake (or about 7.8 million shares in the bank), of which he has sold 7.42 million shares between July 21 and July 23 through open market. He held 0.14 per cent stake or about 7.8 million shares in the bank.

At 10:18 am, the stock was trading near the day's lows at Rs 1,084 on the BSE, down 3.1 per cent, and was the loser on the S&P BSE Sensex index. In comparison, the S&P BSE Sensex was at 37,888 level, down 237 points or 0.62 per cent. 

Puri exercised stock options of Rs 161.56 crore during the year, according to the bank’s 2019-20 annual report. “The shares were allotted to Puri at different times, at different price points (not at par). The acquisition cost and tax have to be accounted for as well. The net amount, therefore, will be much less,” said the spokesperson for HDFC Bank.

According to exchange filings, Puri exercised 3.42 million stock options at an acquisition cost of Rs 158 crore between October 2015 and July 2020, and sold 9.65 million shares, including last week’s sale, for Rs 1,165 crore. 

Aditya Puri, who is set to retire from the bank in October, has been the longest serving MD of a private bank in India. He has been at the helm of HDFC Bank for the past 26 years, since its inception in 1994. During the bank's annual general meeting on July 18, the MD and CEO had said that his preferred successor is an internal candidate, who has spent 25 years at the lender.

However, he did not name the candidate.

"He (the successor) has been with us for 25 years… my successor was always in place, at least in my mind," Puri had told shareholders at the bank's virtual AGM.

As per reports, the bank has put forward names of three eligible candidates to RBI for the position of MD & CEO post retirement of Aditya Puri. Included among the names are two of Bank’s veterans - Sashidhar Jagdishan and Kaizad Bharucha - both of whom have spent over 25 years with the bank, while the third, external candidate being Citi Commercial Bank’s current CEO, Sunil Garg.

For the April-June 2020 quarter, the bank's net profit rose 19.58 per cent year-on-year to Rs 6,658.62 crore compared to Rs 5,568.16 crore logged in the corresponding quarter last year. Besides, net interest income (NII) grew 17.80 per cent YoY to Rs 15,665.40 crore in Q1FY21, supported by growth in advances of 20.9 per cent, and a growth in deposits of 24.6 per cent.

That apart, provision and contingencies increased 48.89 per cent YoY and 2.82 per cent QoQ to Rs 3,891.52 crore during the quarter under review. Total provisions for the quarter included contingent provisions of around Rs 1,000 crore.

Asset quality, however, deteriorated marginally as percentage of gross non-performing assets (GNPA) stood at 1.36 per cent in Q1FY21 against 1.26 per cent in Q4FY20.

"Strong governance and equally strong asset quality has always been the hallmark of HDFC Bank setting it apart from its peers. Bank is expected to build up further on its growth momentum from current levels. We value the stock at 3.5x FY22E BVPS (equivalent to 3-year average forward P/BV multiple)," said analysts at Geojit Financial Services in a report dated July 24. 

Investment Strategy

Siddharth Purohit, equity research analyst at SMC Global Securities, says given the change in management, investors are likely to remain cautious in the near-term.

"The overhang of change in the management will affect the stock in the short-term as concerns will linger regarding the successor's settlement, and soon he gets the policies going," he says. 

That said, he believes investors should focus on the bank's operational performance rather than the change in managemnt as June quarter results show it's loan book grew more due to wholesale lending rather than retail lending.

"I am concerned about the bank's operational performance as Q1FY21 was driven more by the wholesale lending rather than retail lending... Given the current economic scenario, this is not a good sign for a bank. I have downgraded the stock to 'hold' with a target price of Rs 1,050 as short-term concerns weigh on the stock," he says.

During the recently concluded quarter, wholesale loans grew 37 per cent YoY given demand from large domestic conglomerates, entities with international parentage and Navratna-quality PSUs. However, retail growth was 7.2 per cent YoY, but down 4 per cent QoQ as loan originations plunged 70 per cent. Segment-wise, personal loan originations nosedived 86 per cent due to tightened credit policies.

Analysts at BOB Capital, meanwhile, say that the stock could be negatively affected in the short-term should there be a slew of senior management exits during the transition phase. The brokerage, however, has 'buy' call on the stock from the long-term perspective given its strong processes, risk management practices and stable asset quality. The target price is at Rs 1,275.

"Whenever there is a top management change, especially after an elongated period, we witness some uncertainty in the near-term as investors are used to that name being the face of the organization. However, in the case of HDFC Bank, over the years the bank has built-in robust processes and a strong next in line management bandwidth in place which will help in smooth transition over the medium to long term," says Siji Philip, senior research analyst at Axis Securities.