ValuePickr Forum

HDFC Bank- we understand your world

There could be a 1000 probable reasons which there is no point speculating on and diluting the quality of discussion unless there is any evidence that the sale is based on his outlook of near term bank performance.

Anyway, just thinking of it simply - he’s 70, about to retire, and when stock was at all time highs earlier this year his holding was worth 950-1000 crore which crashed all the way to 550 crore in March.

Having recovered 300 crores (read that again…300 crores!) - why wouldn’t anyone want to encash that knowing how volatile markets can be? So I wouldn’t want to read much into this unless there’s evidence of what I said above.

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Correct me if I am wrong, but if his options were expiring and he wanted to hold, he would have had to pay the strike price. By selling immediately he can directly get the difference in strike price and market price and this way he doesn’t have to deploy his own cash so seems convenient.

The reason behind almost entire AP stake sell is anybody’s guess unless you are his close friend. Now what we as investors should do.

  1. The stake sale is just a normal routine sale.
    Here stock price would just perform in line with bank performance
  2. The stake sale is due to AP sees some issues.
    There will be sharp massive fall

Now the probability of getting yourself right is same as getting yourself wrong. There is no data which will tilt probability in favor of any outcome.

So this is a completely speculative situation and an individual has to take his own call whether to be in stock or not as per his methodology. If you think you will take decision when we will get clear picture then by that time stock would have done what it was supposed to do.
During Yes bank people used to comment how can such big bank be in problem when RBI closely monitors it. The picture didn’t get clear until stock fell more than 50%. But everyone knows what happened.

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It’s likely that post Oct he is going to be involved in something related to BFSI and in that role his holding in hdfc could be seen by some as conflict of interest or maybe he himself wants to start on a clean slate without leaving an iota of doubt in anyone’s mind that there is any conflict of interest.

Just thought of adding another reason as everyone seems to be in that mood :slight_smile:

Personally, this event has zero relevance for me as an investor.

Rgds
RR
Disc: Invested

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It is possible that he may be joining any competing financial institution (in non executive/advisory capacity) and he may not want to have any conflict of interest of having massive shares of his current bank, which may influence his ability to provide guidance to his future company For e.g. what if he decides to join Sachin Bansal’s Navi :thinking: :grimacing:

Please note my thoughts are purely speculative in nature and I am just trying to connect the dots here. …I have no information about Mr. Puri’s future plans…

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What you have mentioned may likely to be true. Very possible that the 100% share sale turns out to be a non issue.

However, my only comment will be to please monitor the news and developments a bit more closely than ever. Esp since this is the banking sector and we rely a lot on inegrity of the management in charge.

We are seeing a first change in management as Aditya Puri has been at the helm since beginning. A new management coming in will always entail some kind of shake up / clean ups. As a market darling, continuity of past stellar performance has been baked into the price and if any issues come out in the open publicly in the clean up process, it could quickly snowball into a big issue.

I do not have any basis to say that there is some thing fundamentally wrong at HDFC Bank. But still can’t shake the sense of uneasiness on some points :

  1. Clockwork like 20% growth periodically. It is extremely difficult in India but HDFC Bank breezes through this nonchalantly completely avoiding any landmines when other competing banks have faltered at various times
  2. RBIs foot dragging in case of change in board members as well as on issue of successor (possible they are aware of something and they want to force changes without ringing alarm bells publicly as it is the most visible / biggest private bank in India)
  3. Recent top level exits - Aima (harassment case), head of auto loan (malpractice), CIO (sudden departure) in quick succession close to Aditya Puri’s retirement, just gets one to wonder if people are feeling the heat to clean up things internally before big boss’ departure.

Sorry for the impulsive post, but felt had to state it out explicitly on reading your last sentence. As long term investors, we need to periodically review our investments. In HDFC’s case, now is the time to pay closer attention to ensure all is indeed well with the bank.

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I do not have any basis to say that there is some thing fundamentally wrong at HDFC Bank.

This statement of yours was very honest and was also enough to close the discussion :slight_smile:

But nonetheless your state of mind is a reality many people face even I do (in other contexts) and, therefore, it’s important for us to know how to deal with this mindset which brings uneasiness. Not that I am any authority on the subject but am just taking liberty of this being a social media platform to share my experience :slight_smile:

The points you have raised are mere possibilities and since investing isn’t based of possibility of outcomes but probability of outcomes, it’s important we evaluate each possible event in terms of probability.

Here for all the points you have mentioned the probability is very low, solely based on the track record of the bank and the person and it is this track record which if “studied well (not necessarily studied deeply)” will tell you why the two are in a league of their own.

Just bcoz past performance has been extraordinary doesn’t mean it was cooked up. In the context of hdfc operating in the indian banking industry it was like a well-disciplined, intelligent and self-assured person looking at a sumptuous 7-course meal every day but choosing to stick to a disciplined diet even when many around him went on a binging spree. So a 20% or 30% consistent growth could well have been by design maybe because the opportunity was so large that you could decide how much “you want to grow”.

People like Abhay, Munish, etc leaving was pretty candidly addressed by AP during the last call. But yeah, there are many who wud choose to brush it aside as corporate speal!! They were highly experienced, intelligent, hard working people of high integrity (based on my limited knowledge after seeing some of there interviews, presentations and work over many years). They would have also inspired many in their teams to fill their shoes. To link them to any kind of clean up exercise is a low probability event, for me.

Auto loans issue is something which is an isolated bad event and I wud assume it will only make hdfc bk stronger as they take measures to ensure the possibility of such issues happening goes down.

And as much as one can say that the continuity of past performance is baked into the price it is equally debatable that the “best bank ever” has been beaten a little too much to be trading at decadal low valuations and that this opportunity won’t last long!!

A change at the top means clean up, is also just an assumption which becomes weak the more you “know” the bank and the person. Stricter RBI regulations (AQRs, etc) also help making the overall environment more complaint. Still bank’s asset quality hasn’t changed much. Also, if hdfc has been a high quality bank in India and for a long time then probability is also high that it will also have the high quality borrowers thereby reducing the probability of possible clean ups. Quite frankly, for me, clean up happening at hdfc bk post AP is akeen to conspiracy theories we read all the time on web these days :slight_smile: And yet I don’t negate it fully but just put it way below in terms of probability.

RBI dragging its foot on selection: I would assume these are tough times for RBI, very tough. If I was rbi gov I wud even explore the possibility of extending AP’s tenure by maybe a few months allowing RBI to focus on far more important issues at hand. In these times approving top level changes at a bank which has long been the flag bearer of Prudence and Growth in Indian Banking, can’t be taken in haste.

And yes there is always a fear that a great manager is going and so performance could fall but “it is just a fear“ and we need to work on it ourselves if we want to overcome this fear.

Hdfc bk would still tick almost all the boxes for it to be seen as the best bank in India even after he is gone.

So, in the end, there is no denying the fact that Aditya Puri was a great manager. And it isn’t that it doesn’t matter that he is leaving, what matters more is what he is leaving behind!!

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First post on the forum. Excuse any formatting etc I have missed.

One can look at how insiders have sold over a give time period.

The 3 charts below

  1. All insiders market sale since 2015
  2. Without Mr Puri’s sale over the years since 2015
  3. Mr Puri’s market sales since 2013

Hypothesis 1: Even the insiders other than Mr Puri are selling - doesn’t look like so
Hypothesis 2: Mr Puri is selling - yes offcourse
Hypothesis 3: Why is he selling - only he can answer that

Having said that my bias is that our family is invested in the bank.

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Rather than speculating the reason of stake selling by Aditya Puri, what I think is like this:
What if there is something wrong in banking sector which AP knows and others don’t, well in that case the whole banking sector shall be in trouble and not the HDFC Bank alone. So the top 5 banks shall be the last to fall, followed by HDFC Bank.

Therefore if anyone has negative view on HDFC Bank, he should stay out of Banking Stocks all (not the HDFC Bank only).

Adding to that don’t forget that, Deepak Parekh is also there behind HDFC Bank who is master of selecting talent for his business. His picking right people is explained by the Marcellus Article as below


So retirement of AP shall not be big issue

Disc: investing top 3 holding

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I completely agree with you on above point. Same goes for NBFCs also. If we put us in his shoes, a sudden knee jerk selling of a huge amount would result in various issues like tax implications and utilization of proceeds etc. One would do it only in two cases -
a. Something seriously wrong with the holding or sector
b. For some Compliance - It can be personal, professional, family related etc.

If there is Case a, then there should have been already some skeletons out of the closet. Kotak still wants to latch out to his bank holdings, so I would not think that entire sector is in huge trouble. Vaidyanath has his life savings in IDFC bank (if I am not wrong and somethings changed after I sold off and stopped tracking).

Now, if it is a localized HDFC group issue, then I would be more concerned being a investor in group companies. Anyone has any idea on what other major individual shareholders of HDFC bank or even other group companies like HDFC Ltd and HDFC Life doing? I am aware HDFC AMC’s Prashan Jain did sell out his significant stake but considering the fluctuations in markets and its direct link to AMC business, it was understandable. Also, it was a one third of his holdings which he sold and still holds on to majority two third.

Also, at age 70 (if we rule out Case a and b of Serious issue with bank or any compliance) - someone having such significant holding has two choices - live on dividends and pass on the legacy to next generation Or do as per family choice. If one really wants to dig deeper into this AP case of stake sale, it would help if we know more about how he had been as an investor in his life earlier and also a little about his family and what they would have expected or needed funds for.
Disc: HDFC Group companies form significant part of my portfolio with HDFC Life among top 3.

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from hdfc bank AR: all pending options will get vested on date of retirement or within 1 yr. this may be turn out to be the reason for large selling as he has to vest all pending esops if he wants to

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What does one buy HDFC Bank for?

  1. Predictability of delivering results YoY
  2. Market leading franchise that has weathered a crisis or two
  3. Stable and reliable management team
  4. Corporate Governance

In a business like banking (and maybe IT too), point (1) is usually contingent on point (3). When (3) changes, it has the potential to impact on the other aspects that are taken for granted as well.

All these days when AP was in charge and his core team was stable, the bank was running like a well oiled engine where the core team has a good understanding of each other. Whenever a problem in a particular domain come up, it is very clear to everyone who is going to deal with that and how he will do it. This sort of teamwork is something one evolves into after working together for some time, a set of highly capable people who haven’t spent time working together cannot easily replicate this.

AP moving on and some of the core team members moving out can potentially bring in some flux to what has been a well oiled engine so far. The new person taking charge has to first choose his core team, then spend some time in communicating what the new way of working/template is going to be.

The durability and longevity of the franchise is not under question but the predictability of results that was taken for granted all these years will need to be evaluated for continuity. If this aspect takes a hit with all other things remaining constant, will the premium valuation that the stock commanded all these years continue?

In businesses like banking and IT this factor becomes very important, I would not say the same thing about a manufacturing company. This is easily the biggest transition that HDFC Bank has seen in a long, long time and we need to treat this event with the respect it deserves. For a while think of a scenario where your immediate manager changes and a new person comes in - won’t that be a significant change for you and the rest of the team members even if all other factors remain the same?

Disclosure: No investments, keenly watching how this pans out

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That is where the process oriented company and a relative Monarchy type company differs. I believe in so many years, HDFC Bank and group should not come under the category of a Monarchy. also, if new leader is from within, then he already understands the processes, strengths and weaknesses of the system he operates in and has to lead. Mr Naik left L&T top job, but L&T Infotech is gaining strength. He ensured next leader is capable and his company is process oriented.

If HDFC Bank was not process oriented and a Monarchy, then I would give it a pass even under AP and will eagerly miss the compounding and find other process oriented company to invest.

Big question is - Have Investors so far put their trust in a monarchy or Process. I have a tilt towards process as if HDFC group in not process oriented in India then who else would be? Then entire country would be uninvestible.

Agree, transition needs respect and should be closely watched. Infact, some would even take it as opportunity to build new position.

Disc: Not a buy sell recommendation. HDFC group companies form significant part of portfolio so views will be biased

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You are so right. Process is more important than people in the longivity of any institution. If ADitya Puri did not do that then he did a bad job. HDFC Bank, HUL, Nestle, Accenture, TCS and even Infosys now are priocess driven companies where the DNA has permeated wide and deep. So there could be short term insecurities for investors but I think these should have been take case of under the able leadership of Deepak Parekh and Aditya Puri.

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https://m.economictimes.com/industry/banking/finance/banking/rbi-said-to-have-approved-sashi-jagdishan-as-aditya-puris-successor-at-hdfc-bank-sources/amp_articleshow/77343695.cms

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When facts change, the valuations change. HDFC AMC which is also from HDFC group is also derated recently.

First and foremost, the management recommending an internal person will definitely help in continuing the DNA of the organization. So, the impact will be lesser compared to an external person. Having said that, execution capabilities of Aditya Puri were very good and it certainly helped in giving premium to this stock.

I read a book by name “The End of Competitive advantage” which is about companies which has consistent growth in sales from 2000 till 2009 even though there were unfavourable market conditions. Only 10 companies out of around 5000 listed companies in NYSE were qualified as per their criteria and HDFC Bank is one among them. In the book, the author quotes a statement of Aditya Puri - “Coming to CEO is like visiting a dentist. There will be pain but it improves the current situation”.

https://www.amazon.com/End-Competitive-Advantage-Strategy-Business/dp/1422172813

HDFC Bank so far decided at what rate it wants to grow. With an unprecedented crisis like COVID-19 and replacement of world class & longest standing CEO in banking till date, I believe in the short term, there will be impact on valuations.We don’t know how good is Mr. Sashi Jagadishan in the new role and like @zygo23554 mentioned in the earlier post, he needs sometime to get into the groove.

Disclosure - HDFC Bank is the first stock I bought and continue to hold some portion of it as part of my coffee can. HDFC AMC is one of my top holdings.

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HDFC AMC which is also from HDFC group is also derated recently.

The 3 year historical PE for HDFCAMC is 35 and currently it’s trading at around 40.

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Of course there will be change of valuations, sentiments etc. with change of facts. It is entirely upto individual investors what they want to do with that change. It will depend on what they believe in, a Monarchy or the process or simply wait and watch and take decision later. The point I wanted to put across is that if a change of CEO will result in my abandoning or reducing the company I hold, then I should have not have held it in the first place and look for companies which are not so dependent on a single man in long term. It is now upto us to decide if HDFC Bank is one of them.
Disc: Above are only my views and my way of investing. It may not be as per general consensus and I may loose on latest trends or short/medium term triggers or blips but I am fine with that.

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HDFC AMC itself is listed 2 years back. Don’t know how you got 3 year historical PE :slight_smile:

The point I am making here is - A stock from HDFC group even though the long term prospects are very good and process oriented can also don’t attain the earlier valuation when some facts change.

You can go through the link below where I covered about my analysis on HDFC AMC. I compare HDFC AMC with HDFC Life as both are into sunrise sectors - HDFC Life is at 52 week high but HDFC AMC is way far from it.