Today (July 12) was HDFC's last day on the stock market, after its merger into HDFC Bank. “Our history cannot be erased,” Deepak Parekh insisted when he retired from HDFC last month.

HDFC was Parekh's life's work. The chairman emeritus set aside his American dreams and returned to India from New York in 1978, to join the country's first home financier. Over the next 45 years, HDFC funded homes for nine million families and built a loan book of over Rs 6 lakh crore. 

HDFC was originally the promoter at HDFC Bank, and held 19% stake in its subsidiary. Parekh described this reverse merger in typical Indian fashion: “As the son grows older, he acquires the father's business.”

But this “son” has a difficult challenge ahead. HDFC Bank has underperformed the Nifty 50 and the banking sector over the past three years. It has lagged behind its peer, ICICI Bank, in growth. Regulatory hiccups have also hurt the bank. 

HDFC Bank’s current CEO Sashi Jagdishan heads the merged entity, and his task is a difficult one. HDFC, as Deepak Parekh said, has its own DNA. The already big bank has gotten even bigger with the merger, and there will be ego clashes in management, inherited problems, slow-growing verticals.

Given all this, can Jagdishan usher in a new growth era?

In this week’s Analyticks:

• The game plan for HDFC Bank: Big bets on retail, focus on customer relationships 
• Screener: Stocks outperforming their sectors on quarterly price returns, annual RoCE and RoE

Let’s get into it.

Sashi's plan to "create a new HDFC Bank every four years"

The marriage of HDFC and HDFC Bank becomes official on the stock exchanges from July 13. With this, the bank will be the second most valuable Indian company and assume the highest weightage in the benchmark Nifty 50 - the new 'Baahubali'. 

On a global level, it will become the fourth biggest bank, surpassing global behemoths HSBC, Wells Fargo and Morgan Stanley. 

Within the banking sector, HDFC Bank is still the second largest in terms of its advances. But post-merger, its loan book is more than double the size of ICICI Bank’s as of March 2023.

Laying out his vision for the bank, Jagdishan said, “The pace at which we plan to grow, we can create a new HDFC Bank every four years.” He aims to expand the bank’s asset base at a CAGR of 18%. The addition of HDFC's mortgage book is a big boost here.

Home loans open up cross-selling opportunities

Mortgages now occupy over 25% of HDFC Bank’s advances, with an average tenure of 20 years. The long relationship the bank has with its home loan customers gives it an opportunity to cross-sell other loan products like personal loans, auto loans and credit cards. 

The bank can also strengthen its relationship with home loan customers on the liability side. Right now around 70% of HDFC’s customers (3.5 million) do not have either a savings account or a term deposit with the bank. This is another path for the bank to expand its customer base.

But there is one problem to having a large share of mortgages in the bank’s advances – compression of margins. According to the management, HDFC Bank’s net interest margins are expected to dip to 3.7-3.8% levels, given the lower yields on home loans. 

Going ahead, Jagdishan sees significant growth opportunities in the home loans segment as it is still underserved and underpenetrated.

HDFC Bank wants to get serious: focus moves from sales to 'relationships' 

With HDFC, HDFC Bank has got subsidiaries like HDFC Life, HDFC AMC and HDFC Ergo under its umbrella. The financial products now available to it will reshape the bank's approach to sales. 

Jagdishan says that the new product suite means “moving from sales management to relationship management.” The focus will be on maximizing sales at the individual level.

To do this, the bank plans to “enhance customer experience” by providing truly digital products. For instance, a relationship manager can execute a sale by extending an ‘Xpress car loan’ or a ‘10-second personal loan’ to an existing home loan customer. With a small nudge and the click of a button, the deal is done. 

But of course, there is plenty of slip between the cup and the lip - it's not going to be easy to execute these plans, given the intense competition in the banking industry. HDFC Bank has historically been a massive, slow-moving business surrounded by younger, more agile competitors.

The bank is talking 'digital' under Jagdishan - during HDFC Bank's Investor Day last month, Jagdishan mentioned 'digital' over twenty times - but this area has been a struggle for HDFC Bank as its competitors modernize. The frequent crashes of its online and digital systems are what got HDFC Bank into trouble with the RBI in the first place.

Some of the 'visionary' ideas being discussed are also already in the market - ICICI Bank, for instance, offers an ‘Insta Personal Loan’ with disbursals taking place in just 3 seconds. While the RBI scrutiny on HDFC Bank was active from December 2020 to March 2022, ICICI Bank made big strides in digitization at the expense of HDFC Bank. 

So, digital capabilities alone won’t do the trick.  

Prospects look good for commercial business, but not as much for corporate

HDFC Bank has big expectations from its retail business. But it’s the rural and commercial segments that fired up growth between FY21-FY23. The MSME loans division has been an especially bright star - the bank has grown its market share here by over six percentage points. It also enjoys the lowest NPAs in this industry.

The bank has a lot of scope to expand its market share in MSME financing in at least 200 districts. However, it’s a little cautious in this segment in the short term due to the upcoming general elections, which often result in higher receivables for smaller businesses. 

As for the corporate book, HDFC Bank says it will adopt a selective approach in choosing assets. The focus will be on supply chain finance, loans under the PLI schemes, and new customers. The bank forfeited financing opportunities worth Rs 1 lakh crore in FY23 due to lower margins. It looks like corporate business is not as much of a priority for the bank now. 

HDFC Bank eyes cheaper funds, upper middle class customers

As HDFC Bank hopes to grow bigger faster, getting low-cost funds is critical. But it faces intense competition here among banks for current and savings account customers. 

HDFC Bank’s management is confident in its ability to grow its deposits by tapping into HDFC’s existing customer base and expanding its branch network. The bank is especially focused on capturing the rising middle and upper-middle-class customer segments through new branch additions. Of course, this is the same coveted demographic other Indian banks are aiming for.

While HDFC Bank has multiplied investors’ wealth by nearly 20% CAGR since 2000, achieving market expectations in the past five years has been challenging. This leaves little room for  error for current CEO Sashi Jagdishan.

Jagdishan's blueprint for the bank is promising, but ambition is only the starting point. Execution makes for all the difference between the winner and the runners-up, and investors will be waiting to see if Jagdishan and his team can bring the money in, over the coming quarters. 

Screener: Stocks outperforming their sectors in terms of quarter price change, annual RoCE and RoE 

This screener shows stocks that have outperformed their respective sectors in terms of quarterly price change, annual return on capital employed (RoCE) and annual return on equity (RoE), as per FY23 numbers that have come in. These stocks also enjoy high Trendlyne momentum and durability scores. The screener has 38 stocks from the Nifty 500 and seven stocks from the Nifty 50. 

The screener is dominated by the auto, banking, consumer durables and FMCG sectors. Major stocks in the screener are Colgate Palmolive (India), Nestle India, The Fertilizers & Chemicals Travancore, Angel One and Sanofi India.

Colgate Palmolive has the highest annual RoCE of 79.3% in FY23 and an annual RoE of 61%. Its RoE is high due to robust net profit margin and healthy asset turnover. FMCG companies are not capital-intensive in general and their brands are well established. The stock has risen 17% over the past quarter, outperforming FMCG overall by 6.2 percentage points. 

Nestle India has an annual RoCE of 57.8% in FY23, outperforming the FMCG sector by 25.6 percentage points. Given the presence of established brands like Maggi, Kitkat, Munch and Nescafe in its portfolio, it has a high operating profit margin of 22% and a good asset churn of 2X. These factors contributed to a high RoE of 97.2% in FY23. The company’s stock price grew 17% over the past quarter, outperforming FMCG overall by 6.3 percentage points.

The Fertilizers and Chemicals Travancore stands out in the fertilizers sector with an RoCE of 57% in FY23 and an RoE of 48.1%. The company ranks among the highest in the fertilizers sector in terms of RoCE and outperforms the sector by 23 percentage points. The stock rose 17% over the past quarter, outperforming its sector in price by 32.6 percentage points.

You can find some popular screeners here.