hdfc: Go for ICICI Bank or buy HDFC Bank on dips? Hemang Jani answers

“Given the swap ratio announced between HDFC Ltd and HDFC Bank, an additional 6% arbitrage benefit is available if you buy HDFC Ltd. Certainly, it will take some time for this to flourish as the merger will take about 12 per cent. – will take – 18 months,” says Hemang JanikEquity Strategist and Senior Group VP, MOFSL

HDFC Bank being quoted at a discount
Considering the relentless sales we have seen in both HDFC Bank and HDFC – around 20-25% from recent highs – which is quite surprising that they had such a huge merger announcement and given that HDFC Bank’s operating performance is such. was not. bad. Of course, there were some areas where there was a slight disappointment but in the overall plan, the numbers were very good and credit growth in particular was coming back.

The question is, what does one do, given the kind of improvement we’ve seen for this very well-owned company, both at the institutional level as well as the retail level. We believe that yes, there is a lot of churn going on from HDFC Bank to ICICI or SBI in terms of growth visibility and loss of momentum, which are reporting relatively better growth, but for someone who As an investor and who is looking for full benefits, we feel this kind of franchise available at very low valuation as compared to last two, three years is definitely an opportunity. It may go through slightly underperforming or underperforming but the risk of reward for HDFC Bank and HDFC Ltd is certainly good.

Another point that I would like to highlight is that looking at the declared swap ratio between HDFC Ltd and HDFC Bank, an additional 6% arbitrage benefit is available if you buy HDFC Ltd. Of course, it will take some time as the merger will take around 12-18 months.

For the first time, HDFC Bank is actually offering a discount to ICICI Bank. Do you buy more from HDFC Bank or do you continue to add to ICICI Bank if all fall?
It’s a bit complicated. From an upside potential and absolute risk reward perspective, I think HDFC Bank is better placed at this price point and this valuation, but when it comes to fund managers and people who are looking for relative performance, it What matters is which bank does better in the last one and a half to two years. Clearly ICICI Bank and SBI have been outliers both in terms of operational and price performance.

So the momentum is very high but we have to take into account the fact that HDFC Bank has been a highly owned stock at the institutional level and some sort of restructuring may be taking place. I would definitely feel that there is room for better performance in terms of speed and names like ICICI Bank and SBI. But pure long-term investors should look for an opportunity to buy HDFC Bank, as we have done in the last two or three months.

The market is abuzz with news of a possible merger of L&T Info-Mindtree, though both the managements have categorically denied it, but the two companies have a lot of synergy and complement each other in a good way. How are you viewing this news?
Yes, there is a discussion and for now, the management has denied it and we believe that when one looks at the fact that there is a general management and synergy in terms of the kind of presence they have in the verticals, they complement each other very well and to that extent. It certainly makes sense from a pure management standpoint to consider such a merger.

But the bigger question is, with the kind of de-ratings happening across the IT space and in the case of midcap companies, despite the fact that these companies are giving around 3-4% quarterly growth, is the reality that growth is slowing down? What is happening, margins are under pressure and index weighting and investor ownership certainly exceed ownership across sectors.

So we believe this sector may undergo a little underperforming and maybe underweight a little bit at the index level, but remains a long-term story in terms of digitization, cloud migration and we’re going to need some more pain. Must see. Then look for some opportunities from an investment perspective.

Why are defense stocks rising as not every company will benefit from increased spending in the defense sector? Which is a specific name that could be the biggest beneficiary or recipient of defense budget?
There are two points; Of course one is that the Russia Ukraine war has really focused on defense preparedness for all countries and for all countries globally, there is a clear shift in the kind of spending they want to spend and the kind of Indigenization is what they want to do. They want to reduce dependency.

Secondly, despite the recent Russia-Ukraine issue, the government has identified around 2,851 items that can be purchased from abroad. More focus is being given on awarding contracts and exports and other reforms which are necessary. The government is going to do all that is positive news for this sector.

And in terms of market cap and allocation, the allocation is very low and so there is an opportunity and we like to name a few. Bharat Electronics is something we love. It is a midcap sized company with a consistent track record. So if one wanted to make some allocation in defence, BEL would be a stock. Also, names like Bharat Dynamics, HAL and BEML are names that can be seen for sure.

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