Short Call: The HDFC Bank puzzle, muted hiring trends, IEX, Coal India, Marico, Safari in focus

About this update from Safari Industries (india) Limited

HDFC Bank shares will be in limelight today as the foreign institutional investor holding in the stock has fallen to 54.83 percent at the end of the June quarter. Now why is this important? Because HDFC Bank’s weightage in the MSCI index is set to increase as there is now more headroom for FIIs to buy stock. Put simply, if FIIs have the room to buy another 25 percent or more in a stock within the RBI limit, the entire free float is considered while assigning weightage to the stock. When HDFC Bank’s weightage in MSCI goes up, passive funds will start buying. According to Nuvama, HDFC Bank could see could see inflows worth $3-4 billion between now and end of August. In late May, Macquarie predicted as much as $5.2 billion of inflows for the same reason.HDFC Bank shares have risen around 17 percent in June, indicating that a section of the market would already have been betting on drop in FII holding.Remember, sustained selling by actively managed foreign funds has been prime reason for HDFC Bank’s underperformance over the last many months. The operating performance is not in doubt, but word on the street is that a lot of foreign funds are upset at the way in which the merger with HDFC was done, and also the subsequent management communication.The question now is: will the huge buying by passive funds then drive a rerating as money managers of large cap funds would not want to risk underperformance by missing out on the rally.Last year in July, short Call had posed a question to mutual funds guru Dhirendra Kumar of Value Research: If money simply kept flowing into passively managed funds, how would fundamentals ever matter? Because there would be a self-fulfilling prophecy of inflows lifting the prices of the stocks in that index , which in turn would attract more inflows into the fund.This is what he had to say:“In theory, the game should go on forever as people keep buying even the stupid stocks. But so far, it has not happened that way. Reason is that even if quarter of the money is in actively managed funds, that money sets the pricing. Passive funds have to follow that. Look at the HDFC Bank and HDFC stocks, they have not gone up in the last two-and-a-half years despite being part of the major indexes. Within the universe there is a prioritisation, there is something set outside of the index.”An interesting tug of war between active and passive fund ma...

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