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    Saurabh Mukherjea betting on second-rung financial stocks

    Synopsis

    Marcellus is focusing a little more on the auto ecosystem, premier financials and listed market unicorns.

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    We are hoping to do more investments in smaller market cap financials because we believe well-run financials, well- run lenders, well-run life insurers will have a great 2-4 years ahead, says Saurabh Mukherjea, Founder, Marcellus Investment Managers.

    From CLSA to Citi, Kotak to BofA, all are saying 2021 will be a great year for the economy but not a great year for investors because markets have moved up in anticipation of earnings recovery and valuations are trading 40-50% above historical averages. Do you see merit in this argument?
    I do not think anybody should be worrying about one-year outlook in any stock market. If I could predict stock price movements for six months or one year, then I would have providential powers which obviously none of us have. What is entirely feasible is that there could be breathers in the market as the stock market tries to reassess if the economy is recovering at the pace that people had expected. I have a very strong view that the market will do well over three years but can’t predict what will happen over one year.

    Anybody who is trying to second guess the market at a time when the economy is just about troughing out, is playing a very dangerous game. All we can do is look at fundamentals, look at the results of healthy companies, macroeconomic indicators, company-specific news and global indicators like commodity prices, oil prices, interest rates and capital flows. It appears we are in the early stages of an economic recovery. It makes sense to be constructive about the market and about high quality companies. Beyond that it will be guess work.

    What has changed in the last three to four months in the portfolios or the money you manage?
    The emphasis continues to be on clean, well-run companies. That has always been our focus in Marcellus. There are three areas where we have a little bit more focus in terms of our day-to-day research, in terms of our calling up distributors and doing more channel checks. The first one is the whole auto ecosystem. It looks like the entire auto ecosystem -- including OEMs and auto ancillaries -- is humming. Both at the OEM level and at the auto ancillary level, we will get the next layer of capex announcements as the auto companies will spend another six months with full order books and then they will try to think about the next layer of capex enhancements. Big announcements will likely come through this summer if the auto cycle holds up. The reports that we are getting from lenders indicate loan disbursals for both cars and two- wheelers are very healthy. We are doing more work on the auto ecosystem to see what else we can buy there.

    The second segment is high quality financials. Premier firms like HDFC Bank, Kotak Bank are long-standing favourites. As we see signs of a longer economic recovery, we are going down the market cap spectrum looking at second rung financials and we have made some significant investments there such as AU Finance Bank over the last three-four months. We are hoping to do more investments in smaller market cap financials because we believe well-run financials, well- run lenders, well-run life insurers will have a great 2-4 years ahead.

    The third segment will be listed unicorns. We are looking for companies which have around $800-million market cap mark. These are high quality small companies which could go on to build not just dominant franchises in India but have global potential as well. A very clear trend is coming through that well-run smallcap Indian companies are able to build globally dominant franchises.

    We have earlier spoken about holdings in , . There are two other companies which are building globally dominant franchises. One is Garware Technical Fibres in Pune, which is a world class franchise in the fishing net market. The other is Ultramarine & Pigments based out of Chennai, a manufacturer of inorganic pigments and surfactants. Ultramarine & Pigments is the largest in Asia.

    The coming of age of smaller Indian companies which are not that well known, building dominant global franchises even though their market cap is only $1-2 billion. This would be a very interesting theme in the coming years and a defining theme of this economic recovery. I would call this a listed market unicorn story.

    Can you expand the last theme? You like smallcap manufacturing companies. Is it because of PLI? Is it because of low interest rates or is it because of their whole business approach and technology?
    Why is it that we are finally seeing smaller Indian companies come through with return on capital well north of 20% -- 22%, 23%, 24%, 25%? These are cash generating smaller Indian companies, which do not need bank financing, bank debt, bond market debt and who have significant intellectual property which is proprietary to them and who are consistently driving 20% EPS growth year after year. Why is this happening now? Why did it not happen in the 2006-2007 boom? Why did it not happen in 2014, 2015, 2016?

    I reckon there are three things which have played out in favour of well run Indian manufacturers regardless of market cap. First, GST has given well-run Indian manufacturers, regardless of industry, a genuinely PAN India market to play in. If you go outside Mumbai and go to Bhiwandi, just the blossoming of the logistics industry and the outsourcing by smaller manufacturers of their warehousing and trucking is a straightforward example of how GST is allowing even small companies which are efficiently run to improve their efficiency and ROC by outsourcing activities which they had to do in house. So, GST is helping well-run manufacturers regardless of market cap improve their cash flows and efficiency levels.

    Second, the slide of the rupee towards the 75-76 mark. It has strengthened a little bit on the back of these very strong inflows but the slide of the rupee from mid 60s to mid 70s, has given an efficiency kicker to Indian companies which export. It is evident in IT services but even manufacturing companies like Garware Technical Fibres are the exporters and they are truly benefiting from a more competitive rupee.

    The third aspect is for the last two-three years, we have affordable money, affordable capital and for smaller companies whose suppliers need to be able to access capital and affordable rates. It seems to benefit from a more affordable cost of capital regime coming through but it is very clear that for the first time in 12 years, we are seeing a host of well-run $1-2 billion manufacturers with really classy franchises where cash flows are very strong.

    Franchises are underpinned not just on low cost but around intellectual property, patents, proprietary processes and order books. The biggest challenge to them is how do they grow over the next one or two years without letting things get out of control. So, it is a very promising time for efficient well-run Indian manufacturers. Quite literally, both the domestic economy and the world seems to be their oyster.
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    1 Comment on this Story

    Raj Tillan46 days ago
    Advice is similar to Harshad Mehta , Ketan Parikh Tier one has gone over the hill on FPI .. If west have cash mountain earning zero interest even 2 % may be good enough for them but not for Indians who need at least 6/8 %
    Read before you invest. Insights on Ultramarine & Pigments Ltd.. Explore Now
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