Hi Umesh Sir
In my latest portfolio update, Kotak’s allocation is marginally higher than others. I aim to size all 4 BFSI stocks – Kotak, HDFC Bank, ICICI Bank and Bajaj Finserv – equally around 4-5%. In fact, I made some efforts in that direction today and slightly increased allocations in HDFC, ICICI and Bajaj Finserv
The reason for equal weight portfolio and not concentration
As mentioned a couple of days back following is my broad definition of a franchise, the description of which fits all 4 companies. I do not have any “differentiated insight” which enables me to find which among 4 has a better and more durable franchise
On your point of stock going nowhere and weak recent earnings
As Kotak Securities’ recent note puts it – the banking sector has gone through a process of ‘democratisation’ of multiples in the past 3-4 years. Multiples of earlier ‘Corporate’ private banks and PSU banks seeing rerating on improved performance of the banks with higher ROAs reflecting higher NIMs and lower credit cost ( barring the current quarter ). At the same time, multiples of earlier favourites see a derating because their superior underwriting skill is less of a differentiator in reasonable credit cycle conditions and also because of specific bank-related issues
( P.S. – Don’t think I am that smart after reading these lines. These are word to word copy from the report but I thought they are relevant here in answering your query )
This is the main reason why Kotak’s / HDFC’s multiples have converged with other banks leading to underperformance
Why I am buying only these 4 companies
Baggage of the past cycle
It’s a shame that I entered this bull cycle with the baggage of the past bear cycle where there was serious damage in a few names because of either poor underwriting decisions or asset-liability mismatch. I still remember that day when DHFL was down 60% in one day. I as an investor have failed to come out of that impact which is where I would like to improve in future
Witnessing benign credit conditions for the first time
In my investing career which started around 2014-15, this is the first time I am witnessing conditionals like these. First time I have seen PSU balance sheets so clean. To be honest with you, I did not know how to react and how long these conditions can last
Therefore I am sticking to names which has proven underwriting (rightly / wrongly )in the past cycle being fully aware that I don’t deserve any alpha because of the above 2 points. Having said that – I still believe these 4 companies hold earning power to grow earnings in high teens in future
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