Saurabh Mukherjea exits HDFC Asset Management from the Kings of Capital portfolio

Saurabh Mukherjea has announced a change to the Kings of Capital portfolio, namely, exiting HDFC Asset Management. He stated that owing to reduction in our expected long term earnings growth forecast for HDFC AMC, our position sizing framework has suggested an exit from the stock.

The three core stocks in the Kings of Capital portfolio are HDFC Bank, Kotak Bank and Bajaj Finance. These lenders have taken different paths to achieve the ~20% BVPS compounding.

HDFC Bank – the true consistent compounder: HDFC Bank has consistently paid dividends using ~20% of its profits over the last decade. However, the bank raised capital twice during the last 10 years. Given these large capital issuances at high P/B multiples and stable RoEs (at 18%), the bank was able to post 21% BVPS compounding.

Kotak Bank – the master capital allocator: Like HDFC Bank, Kotak bank also compounded its BVPS at a healthy rate of 19% CAGR, however, the bank adopted a different route. Over the last 10 years, Kotak Bank paid negligible dividends but raised large amounts of equity capital – the bank has raised capital 4 times (once for the ING merger and thrice otherwise) – at high P/B multiples. The bank scaled up its subsidiaries in the last 10 years and allocated capital prudently across all its financial services businesses. Along with HDFC Bank, Kotak was the only other large bank to come out unscathed from the corporate asset quality cycle of FY05-15.

Bajaj Finance – the high growth engine: Bajaj Finance has paid out ~12% if its profits as dividends over the last 10 years. Bajaj Finance was the fastest growing lender over the last 10 years (32% loan book growth vs. 21% each for HDFC Bank and Kotak) and also the lender with the highest RoE (around 20%). It was thus able to compound its BVPS at a rate of 31% over the past 10 years.


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