Why PPFAS Mutual Fund swapped one HDFC twin for the other?

Parag Parikh or PPFAS Mutual Fund (MF) is known for its regular and clear communication with its MF scheme investors. A recent note from Rajeev Thakkar, CIO and director, PPFAS MF explains the rationale behind some of the recent changes in the fund house’s stock holdings. 

The highlighted changes are – a switch from the shares of HDFC Bank to HDFC, rebalancing of the weightage of the ITC stock, and investment in Coal India shares. It also touches upon the topic of ESG (Environmental, Social, and Governance) investing. 

Thakkar explains that HDFC and HDFC Bank have already announced a merger and the merger ratio (25:42) is also known. Given that the two are from the same group and have already sought relevant informal permissions, the completion of the merger is largely a formality. According to him, since PPFAS MF intends holding HDFC Bank, it made sense to invest in the company which is cheaper given the exchange ratio. “There was a 3% difference between the two companies after transaction costs. This position, which is close to 2,000 crores (about 8% of the portfolio) gives a benefit of nearly 60 crores or a 24-basis point benefit on the entire portfolio,” says Thakkar. 

On ITC, the fund house feels that while the stock continues to be reasonably valued, the attractiveness has reduced a bit given the doubling of the stock price from the lows. The portfolio weightage has also been threatening to breach 10% of the portfolio due to price appreciation. As a result, some ITC shares were sold to bring down the weightage. Going by the July 2022 fact sheet, the fund house had 7.5%, 7.1% and 2.1% exposure, respectively, to the ITC stock in its flexi cap, tax saver and conservative hybrid funds. 

What seems to have surprised many people is PPFAS MF’s exposure to Coal India. Based on the July 2022 fact sheet, the fund house had 4.2%, 5.5% and 2.2% exposure, respectively, to the Coal India stock in its flexi cap, tax saver and conservative hybrid funds. “We are strong believers in the shift towards renewable sources of energy and we did not view Coal India as a ‘buy-and-hold for decades’ kind of company,” says Thakkar. Among the reasons given for holding the stock for the medium term are its high dividend yield and the likely benefit from some volume growth in production and sales to reduce import dependence, and the possibility of some price increase given the steep discount at which Coal India sells coal compared to global prices.

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