Saurabh Mukherjea is buying his top picks every day

“Our economic outlook is the best I have seen in 12-13 years; the banking system is in best shape in the last 20-25 years. The pullback in India has got very little to do with fundamentals but everything to do with the fact that a lot of American investors have huge compulsions bearing down upon them in their private portfolios. Perforce, from a compulsive perspective, they have to reduce their emerging market holdings. We are part of that settle down process,” says Saurabh Mukherjea, Founder, Marcellus Investment Managers.






There was a time when your thought process was getting rewarded by the market whether it was identifying good companies with good cash flow or identifying companies which had a business moat around them. The same thought process right now is not working. High PE stocks are getting punished and markets have a complete disregard for great franchises. How are you dealing with this cycle within a cycle?

I do not think the correction in India or globally has that much to do with high PE. I know this is a perpetual perception that high PE gets punished, but it honestly does not show up in the data. So whether it is Indian power and infrastructure stocks or Indian consumer stocks or Indian banking stocks or indeed even in American bellwether names like Microsoft or Walmart, there is a global pullback. That gives us a clue as to why at one level we should worry about it but on another level, we should buy as much as we can in these circumstances because the pullback that is happening in our market has very little to do with fundamentals.

Our economic outlook is the best I have seen in 12-13 years; the banking system is in best shape in the last 20-25 years. The pullback in India has got very little to do with fundamentals but everything to do with the fact that a lot of American investors have huge compulsions bearing down upon them in their private portfolios. The unlisted portfolios have been decimated in the last six months. In their public market portfolios, they are down 30%. Perforce, from a compulsive perspective, they have to reduce their emerging market holdings. We are part of that settle down process.

Since this settling down is not taking that much regard of fundamentals, our job as sensible investors is to just keep a rational mind and keep buying the same stocks – the high quality, high cash generative, great franchises – which are available even cheaper now than they were two months ago. We are buying as much as we can. We are extremely thankful to the clients out there as they continue to give us inflows even in these circumstances and we are taking full advantage of that to buy every day.

What you are telling me is that you were getting on an average Rs 100 crore when the things were going great. Your clients are not panicking and if is going down, it is not because Marcellus is selling it? We cannot blame it on Saurabh Mukherjea?

We are buying every day. We stopped getting Rs 100 crore once the war began. The number now is closer to Rs 50 crore a week and of that Rs 50 crore, roughly Rs 10 crore a day we are deploying in the various stocks that you and I have discussed over the years.

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In some cases, where the corrections are more severe – for example Dr Lal is down 30-35% – we bought Rs 100 crore of that over the last couple of weeks. That has to be the job offer of a sensible investor. Our job is not to become a macro economist, when everybody in the world is pretending to be a macro economist and prophesying what the Fed will do and what will happen to global GDP. Our job is to just keep a calm disposition and carry on buying great companies, especially since the macro outlook for India is the brightest I have seen for a long long time.

I am not going to let that go, it is the brightest after a long time and we speak to a fairly wide range of foreign investors. Some of them are our clients, some of them I am hoping will become clients and I can see their enthusiasm and the interest and the sheer amounts of time they are spending with us as they contemplate building out large Indian portfolios.

But when there is a reboot button which has been pressed in the world for interest rates for assets, for risk, a lot of normal also change and one such normal which is changing is the normal for the paint industry. What will happen to the paint industry following ’s entry?

Very little happens in business life which has not happened before. It is not as if business history starts with the creation of Marcellus and we have seen these cycles before. There are two different dynamics rippling through the paint industry today.

The first one is the jump in the prices of crude. In the last 20 years, even in at least three occasions where in the space of 80 months, the price of crude has doubled and in each of these occasions Asian Paints and

have held onto their gross margins and operating margins because of the sheer strength of the franchises. With a lag of a few quarters, these companies pass on the raw material cost hike on to the customer base and protect their margins. That is the definition of pricing power and that is what a great franchise does.

Secondly we have seen big ticket entry. So? Sherwin-Williams entered in 2006 or 2007. They burned the best part of a billion dollars in four or five years and they could not get to more than $10 million of revenue. That was the world’s largest paint company and a billion dollars back then is comparable to a couple of billion today, which is roughly the number that is being mooted for Grasim.

So we have seen this before. Plenty of people try to enter the franchises that the companies invest in, whether it is

’s franchise or

Bank’s franchise or Asian Paint’s franchise and because of the moats, because of the sustainable competitive advantages, those advances are throttled and our investee companies continue growing free cash flows at around 25% and continue compounding. That is the nature of investing. If it was so easy to build an Asian Paints, given that the company is 70-year-old, somebody else would have done it. If it was so easy to build an

, somebody else would have done it. If it was so easy to build a Titan; somebody else would have done it,

These are extremely difficult franchises to build and whilst their high PE multiples attracts competition, it is very difficult to replicate what these sort of great franchises do. A couple of caveats, Marcellus is heavily invested in these names, I am heavily invested, my parents are heavily invested in these names through Marcellus.

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Harry Byrne

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