Thanks Chaitanya and Girish for your replies and comments. Thanks blp for your like.
Chaitanya I cant tell you how tempting both the banks are for investment. However, I am in equity allocation contraction mode. I want to take my cash and bond % to about 50%. There are some bank specific irritants in the short-term for HDFC (merger consummation), and Kotak (management succession). Also there is general political risk (loan waivers given upcoming elections?). I am mentioning this as I noted you asking anti-thesis on banks in many threads. However, they are attractive on medium to long-term basis. Kotak is complete way of playing financialisation of the economy as it has most stake/control over their profits from its non-lending subsidiaries like insurance, AMCs etc. I like Insurance and AMC kind businesses as they participate in upside and don’t give up much during downside (from P&L perspective). Sorry for making khichdi here but I wanted to write all what was I in my mind.
By the way on your point of covering global banks, I used to have over 60% of my portfolio in financial services until 2017. I was into Yes Bank, Bajaj Finserv, ICICI Pru Life, HDFC Life, AB Capital, Edelwiess, Care, ICRA, BSE, MCX and there might be more which I may be forgetting. Too much for circle of competence
This brings me to my Rationale on Bajaj Finserv (7% of portfolio, 60% profit):
Background - My first buying in Bajaj Finserv (BFL) would have been at 80 rs (accounting for split and bonuses) in 2013. My portfolio was tiny but I kept adding BFL until 2016/2017 price range upto 300 rs. Stock weight reached to 30% of overall portfolio by 2017. I stopped adding too much to it and started trimming on rises and adding on dips only. My last transaction (buy) was in December 2022 at price of 1517. My profit % looks distorted, my realised profit is ~2x of current outstanding position.
Early in 2012, one of my friend in office called me to his desk and said JP I calculated the NIM (net interest margin) of Bajaj Finance which is coming over 20%+, is this correct? I have covered 100s of global banks over a decade and highest NIM I came across during that time was Brazillian banks at around 10-12%. Indian banks were doing margin of 3-5%. We recalculated and found that number to be correct. It was shocking for us to see NIM of 20%+. What we did? Nothing. I don’t know why we did not act on this knowledge, not sure if we found stock expensive (3x price to book). Please note Bajaj Finance was not part of our coverage and it was just random exercise (may be because stock was doing well).
A year down the line in 2013, I came across Bajaj Finserv which was recommended by Mr. SP Tulsian Go long with Bajaj FinServ advises SP Tulsian on CNBC TV18. I looked at the valuations and found that stock was available at 1x price to book. I thought I will exit when it reaches above 2x p/b. However, everytime I analysed it I found this business good to better and better to best. This news RBI bans zero interest loans on EMI to credit card holders - Times of India was another trigger for my bullishness. In Sep 2013, RBI banned 0% interest offerings by banks. It was easy to guess the winner - Bajaj Finance, subsidiary of Bajaj Finserv. I said to myself I have never seen such a great franchise (diverse, highly profitable, fast growing and innovative). This was the only company in general insurance space which had combined ratio below 100% which meant it was profitable post underwriting expenses and claims payments. General Insurance was growing at a fast pace. Its consumer franchise (Bajaj Finance) was anyways doing extremely well. So in 2014 I added large quantity during Diwali Muhurat Session. The only risk now on my thesis was Bajaj Allianz’s call option of buying stake in both life and general insurance. However, that option lapsed in 2016 (not quite sure on this) then I went berserk and allowed BFL to go to up to 30% of my portfolio by 2017.
Some other things which helped me in my early years is that stock was not going down despite some market corrections. Then IPO buzz of HDFC Life kept the stock in good stead. More recently its life insurance business also started performing well. In Q1 FY2024, BFL has launched AMC business which shall add to diversity as well as reduce lending related cyclicality. My current stance is not accounting for any success in its marketplace business.
In 2019, when every NBFC was gaining in stock price on the news of applying for bank license, Mr. Sanjiv Bajaj, Chairman, made it clear that they will not apply for the license. I was really impressed with this clarity and not getting into bandwagon. Having covered banks I understand the burden a bank has. However, recently I have noted RBI coming to guard banks with various tweaks in the rules. Though I am much more interested in non-lending businesses who is to complaint with Rajeev Jain at the helm. He says we are in the business of risk not lending Bajaj Finance: We Are In The Business Of Risk, Not In The Business Of Lending - YouTube. Also when your answer to all the success/problem is ‘Rajeev Jain Bro’ then what to worry
Disclaimer: I am not a financial advisor and nor a SEBI registered Analyst. The content shared here is only for learning purpose. All the names mentioned here are for example purpose. I may buy more , exit or partly sell the stock without any prior intimation.
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