In other news, Reliance Industries Limited (RIL) has lost the first spot to HDFC Bank in terms of the weightage in the NIFTY 50. HDFC Bank stocks have been rallying despite an RBI report on a possible spike in Gross NPAs. What led to the events? Let’s find out. 

The NIFTY 50

The NIFTY 50 is a benchmark index of the National Stock Exchange(NSE). A benchmark index gives us an overview of the conditions of the market. The NIFTY 50 as an index is made up of 50 companies from 13 sectors, decided by India Index Services and Products (IISL) which is a subsidiary of the National Stock Exchange. A company’s relative position in terms of share price and market capitalization decides its weightage in the NIFTY 50. 

RIL took almost a decade to reach the top of the ladder in the NIFTY 50. However, HDFC was leading the crown at the beginning of 2020 till the COVID-19 pandemic struck. There was pessimism in the banking sector when almost all the banking stocks tanked. due to rising bad loans during this period and HDFC lost its position to RIL.

RIL vs HDFC

Meanwhile, Mukesh Ambani, the RIL-supremo, was busy getting investment for his companies and focusing on making Reliance Jio a net debt-free company. This brought RIL in the top spot yet again. Everything was going in favour of RIL, until the Amazon-Future Group-Reliance retail war began in November 2020. 

RIL lost its position to HDFC for three reasons:

  1. The Reliance-Future-Amazon retail war caused Reliance’s acquisition of Future Group to hit a roadblock. This did not go down well with the market. You can read more about it over here.
  2. There is a resurgence of the COVID-19 virus in Europe along with a new strain found in the UK. RIL’s primary source of income is oil and refining which took a hit as uncertainty regarding the second wave of the pandemic came around.
  3. Reliance Jio’s numbers took a hit as VI and Airtel have started gaining market share. Recently, VI was listed as having the fastest 4G internet speed in India leaving behind Airtel and Jio. The recent farmer’s protests have brought Jio into the limelight causing attacks on Reliance Jio towers and loss of users to Reliance Jio.

HDFC Bank on the other hand showed a pretty good Q3 result. It has gained 36.14% in the last 6 months. The reason behind HDFC Bank’s rally is an increase in Foreign Portfolio Investor(FPI) holding coupled with an increase in loan disbursements. The FPI holding has been increasing constantly for the last three quarters straight. As of now the FPI holding in HDFC Bank stands at 39.35%.

Why Stay Cautious?

As India rolled out its first vaccine, market sentiments are much higher than required, this might cause overvaluation of a stock, especially in the banking sector.  RBI has recently released a report where it states that some of the bank’s bad loans or NPAs could rise to 13.5% unless those banks manage to meet certain capital requirements. You can read the official report as given by the RBI over here.

In mid-November 2020, marketfeed came up with a writeup on how banks are sitting on an NPA time bomb and why the bank results are not as good as they appear to be. Considering this, you can expect an increase in NPAs of banks somewhere in the next two quarters. Read: Banks are Sitting On A Bad Loan Time Bomb!