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Three financial giants HDFC Bank, Kotak Mahindra Bank and Bajaj Finance, which is almost half of PMS fund manager Saurabh Mukherjea’s Kings of Capital portfolio, are having a tough time. But the star stock picker isn’t the one to switch sides when the going gets tough.

“If you find a high-quality company where you have great faith in the quality of the promoter, great faith in the management, and the shares have come off to low valuations, you double down,” Mukherjea told ETMarkets in an interview.

He also lists three reasons why Kotak Mahindra Bank, which has lost its valuation premium over regulatory and top management exits, will bounce back. Edited excerpts from a chat with Saurabh Mukherjea, Founder and Chief Investment Officer of Marcellus Investment Managers:

Three stocks in your portfolio – HDFC Bank, Kotak Mahindra Bank and Bajaj Finance – have been in the news for RBI’s ire. How big do you think regulatory risk can be for lenders?
Saurabh Mukherjea: With highly-regulated industries you have to accept the smooth with the rough. The smooth aspect of it is that new competitors find it hard to enter and so you get high ROEs for the incumbents as seen in Bajaj Finance and HDFC Bank. If you’re a competent, well-run company in a highly regulated sector, your return ratios are very high. And, if you reinvest the high profits, and your growth machine runs well.The rough aspect of being in a highly-regulated industry is that the regulator can come after you. So, as you saw in HDFC Bank’s case, the regulator suggested remedial measures, HDFC Bank implemented the remedial measures, and profit growth rebounded. I have no reason to believe that Bajaj and Kotak will find themselves in a different position.These are smart companies run by intelligent, well-paid individuals, and I’m sure they’ll do the needful to deal with the RBI’s strictures. In fact, Bajaj Finance already seems to have done the needful.

In our case, we bought more of HDFC Bank when it had pulled back. Kotak continues to remain in Kings of Capital.

You’re not increasing or decreasing your position in Kotak?
Saurabh Mukherjea: I won’t be at liberty to tell you what our trader is doing today. But as I said, the general theme has been, if you find a high-quality company where you have great faith in the quality of the promoter, great faith in the management, and the shares have come off to low valuations, you double down, right? So, the example I’ll cite is HDFC Bank. We raised our stake when the first phase of regulatory action from the RBI came, and then we doubled down in January when the stock corrected after the NIM being stagnant quarter on quarter. So, if the people that you trust are running the institution well, then you look through the regulatory announcement and try to capitalize on the situation.

Given the valuations, do you think HDFC Bank and Kotak are no-brainers for somebody with a 5-year view?
Saurabh Mukherjea: I won’t say it’s a no-brainer as that’ll be an insult to somebody’s intelligence out there. All three lenders, Kotak, HDFC Bank and Bajaj Finance are in an economic upcycle, are well-capitalized, have long track records of good capital allocation and good asset quality management. It’s difficult to ask for more than that while investing in a lender.

Kotak has lost its valuation premium. Do you think the shares will recover?
Saurabh Mukherjea: I am pretty sure that the storm will blow over one day. Firstly, the RBI had a choice of what action to take. They had a choice of instruments to apply. The fact that the RBI is choosing to say that there are specific issues around mobile banking and credit cards, and giving Korak a chance at rectifying them, suggests to me that they believe Kotak can sort this out.

Secondly, over the last three years, earnings compounding has been close to 25%. And I think we have seen Kotak go through the last three years with a 0% return and close to 25% profit compounding. So, the stock has already derated.

Thirdly, the management team remains high quality. Uday Kotak remains on the board. The bank continues to carry his name. He remains the largest shareholder. At 6 times debt-equity ratio, the bank is significantly over-capitalized. I don’t have any reason to believe that what’s happened in terms of the recent regulatory action from the RBI is a permanent state of affairs.

  • Published On May 7, 2024 at 12:17 PM IST

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