The big story lies in firms like La Opala, Astral Poly, Greenlam and Kajaria transforming themselves from Rs 150-200 crore to Rs 3,000-10,000 65603155 65594704 65593550 crore companies over 10 years and they are going to change the construction of BSE 500, Saurabh Mukherjea, Founder, Marcellus Investment Managers, tells ET Now. Edited excerpts:The choice of the firm’s name is very interesting. It is Muhammad Ali’s middle name so you so he was Cassius Marcellus Clay and Marcellus also means little warrior. I may not be little anymore but I thought it is a good name to begin a new career with. But investing is all about keeping patience in long term and a boxer slugs out for about three-four minutes in the ring. It is smash and grab. But Muhammad Ali was the only man to win back the world title five times over the course of 15 years. So, a long, very successful career. What is happening in the market? It is not that all the concerns in the world are over. It is rare to see a record high on the Nifty and a new low on rupee! In a way, the divergence is helping. It is clear that a weaker rupee has helped the IT sector and it is now helping the pharma sector. If you look at Q1 results, the sector which produced the biggest earnings surprises was pharma. If you look at the last four quarters, IT was the sector which is consistently surprised in the upside with earnings. And this will carry on as the rupee heads from 71 to 75 type mark.IT and pharma are big winners. Auto ancillaries with export franchises, firms like Balkrishna which I saw you guys flashed up or an MM Forgings, have 60-70% of the earnings coming from abroad. Auto ancillaries will also benefit. So, a weaker rupee is good for the market. It will help companies with big export franchises benefit. But more generally, the economy is chugging along reasonably well. Consumption, even the lighter end of capital goods such as cement spending is picking up and that will continue till election. The main concern for me remains the BFSI sector. Valuations are stratospheric. Whether it is the banks or housing finance. These are unbelievable valuations in a rising interest rate, rising inflation environment. It is a very worrisome combination for BFSI. That is 40% of the market. Absolutely. Which means 40% of the market is not looking good. If the heart of the market is not pumping or beating, that means there is trouble. The index does look overvalued because BFSI is a good 20-30% overvalued. And the history is very clear. Every time monetary policy in America tightens – 2006, 2008, 2013 – the cost of money in America goes up, Bankex corrects 30% to 35% in six to seven months. So the writing is on the wall . With oil rising, inflation picking up, another two rate hikes from the RBI this side of the election looking likely, it is high time for people to think about their exposure to BFSI, particularly housing finance companies. It is the sharp end of the BFSI conundrum. You in your latest note talked about creative destruction in the Indian market and rightly so, taking a leaf out of your own note -- be it roads, phones, internet companies, low cost flights, destruction is just about everywhere. But where is that undiscovered destruction which is either waiting to take place or has not been discovered fully by the market? One of the most interesting stories in India in the last decade has been the rise of smaller towns in India. Cities like Ludhiana, Coimbatore, Pune have grown enormously. They have become very prosperous and the more I go into that world, I realise that the rise in connectivity, better roads, telecom, electricity is helping small town India boom.What you are getting is a whole slug of regional players who are expanding their ambit, and they are gradually becoming national players. Three examples would be La Opala, Astral Poly and Greenlam. If I go back 10 years, market cap of firms like La Opala or Astral Poly would be Rs 150-200 crore. Now La Opala m-cap is Rs 3,000 crore, Astral Poly is Rs 9,000-10,000 crore. You can throw Kajaria in the mix as well. These firms which were Rs 150-200 crore 10 years ago now have market cap anywhere between Rs 3,000-10,000 crore, driven by their ability to transform from regional players to national players. That is the story I am seeing getting replicated across numerous sectors whether it is in B2C or in B2B. That is going to be the big story of the next 10 years. Half the firms on BSE 500 that we see today, will not be there anymore and a new bunch 250 to 300 new firms will come into that.That is the churn to play for. The change in a way is not so much in Mumbai or Delhi or Bangalore. The change is a little far away and that is where the really exciting opportunities are. The markets are at record high and typically at a time like this there is usually a slew of IPOs hitting the market. But you are talking about the IPO pipeline drying up at a time when the markets are at record highs or rupee at a record low. So I am not so sure that the IPO pipeline itself will be the big source of opportunities. If I look back the IPO of the last couple of years, really good IPOs. But burgeoning IPO market reflects that the markets in general are moving towards froth and that may not be the case this time. The IPO market in a way has peaked. The IPO frenzy peaked around six-seven months ago. We are tapering out. Private equity is the main driver of IPOs. It is not so much promoters saying we need to run to the stock market and cash out at the top, it is more private equity which is driving it. The classic sign of a market top is a very narrow market which we have for better or for worst today. There is a narrow market driven by six or seven stocks. And, so you have got BFSI at full throttle, making up for 40% of the market. No sector in India has been so much in the Nifty. A narrow range of leaders and monetary policy tightening both at home and abroad would suggest that the overall market looks toppy but underneath that toppy market, is creative destruction where well run small companies are coming through very strongly. Take a company like MM Forgings. It is not a front-line auto ancillary player but steady 10- year numbers, a solid franchise in forgings, two-thirds of the revenues coming from exports, rupee weakening -- those firms should be the things to look out for. You say you are excited about owning small companies which could become big companies in the B2C segment. Give me an example of disruption in the B2C segment. For example, there is a firm called Amrutanjan which makes balm. It is a great company. They are very strong in Odisha, Bengal and south India. They are so strong that the Zandus and the Vicks of the world have not been able to dislodge them. Market cap is about Rs 800-900 crore. The land that they own itself is around a third to half of the market cap. ROCEs are 20-21% or 15-20% growth and have, steady regional franchise. Now, will the promoters scale it up and build a pan-India franchise? I have not got an unequivocal yes from him at the moment but a brand like Amrutanjan in the new networked India has several opportunities. Whether it is because of organic growth or because say a cash generative FMCG major says I need to expand my south India franchise, whichever way you cut it, these sorts of firms look very tasty to me. There is very little debt on the balance sheet and so you are not dealing with indebted, high debt equity stories. You are dealing with cash generatives, a mini version of coffee can. Firms who have good five-six years and who look to have the potential to give you 10-20X over the next 10 years. They have moved into juices and female hygiene. You are very well informed. What they are doing is they are taking the same channel that they have built and they are selling more through their channel. My reckoning is they both will try to take a leaf out of Vicks and Zandu’s playbook plus they will try to pump more through the channel. Now small firms like this will make one or two mistakes along the way. But if the underlying capital allocation is sensible and ROCE is strong, you got a very powerful earnings engine there which can create wealth. That is why I cited firms like La Opala, Astral and Kajaria as examples of just how much wealth a well-run small company can generate. But tell me a little bit more about your coffee can style of investing. How is it that you pick out these emerging champions? Is there a methodology to it? There are two anomalies in the Indian market which allow you to make money consistently. One is the coffee can and sitting in this chair, I explained how we look back at the last 10 years look for 10% revenue growth and 15% ROC. But when you go into the world below the BSE 500, you do not really have small companies with such stellar track records. What you are looking for is over five-six years have these firms grown the business whether it is in revenues or business they have over the last five-six years. Has the growth been profitable? Have profit margins improved as the businesses scaled up? And has the growth come from internal funding rather than having to rely on QIPs and bank debt? If these three criteria are met -- consistent growth, self-funded growth and growth accompanied by margin expansion and profitability expansion I tend to get very interested. There was a bunch of meetings with management. I tracked people who know the company, distributors, dealers and got a fix on the quality of the management. At any given point in time, there are around 15 to 30 companies who comfortably fit into this slot and interestingly very few of them come to Mumbai for broker conferences or for TV studio interviews. This means people like me can discover them and quietly build a position.What do you like about Page Industries at these levels? Page continues to be a coffee can counter. It was my first book four years ago. It has given about 30X in 10 years and perpetually there is this concern that it is overvalued and tomorrow morning it will correct and we will lose our shirts. It may not even correct. It is just like why would I go in for Page Industries? It is the classic story of a firm which came out of nowhere 25 years ago and built a pan India brand and in the undergarment space, it is not obvious to me if anybody else is remotely close to this company. They started with women innerwear, men innerwear, kids and now lounge wear. They are consistently growing the business into adjacencies and ROCE are approaching 50%. It remains a holding for me. I have a remained a steadfast fan. I know it is expensive but coffee can franchises have this ability to give you 200X over 20 years and I would rather hold out for that than cash in early.
from The Economic Times https://ift.tt/2LF0pE2
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