Citigroup Inc Sells Its Entire Stake In HDFC

Today, as per media reports, a major deal has occurred on the exchange between mortgage player HDFC and the Citigroup Inc. Citi offloaded its entire 9.86 per cent stake in the HDFC. Keki Mistry, CEO of HDFC, in an interview said that most of the shares were picked up by foreign Investors. Also, the existing investors and other domestic fund houses made some buying. With the group selling a huge number of shares (14.53 crore), it was obvious that the scrip was bound to trade lower on the bourses. 

HDFC today closed 3.45 per cent lower at Rs 676.20. As per the media reports, the shares were sold at a price of Rs 657.56 which in turn will result in an approximate cash inflow of around Rs 9,555 crore for Citi.

Citigroup Inc finally decided to sell the stake of HDFC after holding it for almost five and a half years. There was news that the group was facing pressure on its capital front which ultimately resulted in selling the entire stake to enable the inflow of money. Earlier in 2006, the group had purchased 9.3 per cent stake in HDFC for an approximate value of Rs 3,380 crore. With this sale the Citigroup will get a return of around three times over the holding period. Earlier, in June Citigroup had sold an approximate of 1.5 per cent of its stake.

With the Citigroup selling its stake in the market there will be more shares of HDFC floating around. Earlier in the year 2008 when the markets were in caught in a downswing, HDFC had the benefit as its shares were in the hands of a big partner like Citi which inspired a sense of confidence among shareholders of HDFC. One should note that during those downturn times Citi was actually in need of funds but did not liquidate the investment as it had a sense of confidence from HDFC. From here on, the increase in liquidity in the market (free float) will drive additional volatility in the scrip.

Earlier in February, Carlyle, a US private equity investor, also exited with a part of its stake in HDFC. Carlyle reduced its stake from 5 per cent to 4 per cent.

With two major foreign investors exiting the stock in a short time the management said that Carlyle was an equity player with a shorter time period while on the other hand Citigroup went off on account of their capital issues. 

We went further to see the performance of HDFC versus the boarder market over the last six years, as tabulated below.

In the December quarter of 2011, the company reported a marginal growth of 10 per cent to Rs 981 crore. On the valuation front also the company is available at a price to earnings multiple of 28.22 times and at price to book value of 5.76 times. We understand that being one of the leading players it would command some premium but at present it seems little bit expensive. Overall, HDFC is one of the largest mortgage lenders and will continue to grow at a decent pace going ahead. As of now, there is some pressure on the scrip and therefore we would advise our investors to keep a ‘hold’ stance as we believe that HDFC is a good long-term bet and would garner better returns over longer period of time.