Saurabh Mukherjea's 3 Little Champ picks for 10 yrs

“We are delighted about the fact that people sold Divi’s. We want to capitalise on that. There is a clear restructuring of global API sourcing lines against China in favour of India and our deduction from that is in favour of Divi’s and therefore we remain buyers of Divi’s on a daily basis, ” says Saurabh Mukherjea, Founder, Marcellus Investment Managers

There are two companies within the pharma space which you have admired for their accounting practices – and Divi’s. I do not see any problem with the disclosures but Divi’s earnings are now going through a patch of cyclical downturn or there is a challenge in the category largely centred around APIs?

I think Divi’s earnings were firecracker earnings – both the Q4 and FY22 numbers. The brokers expressed concern that one of the reasons they had such stellar earnings in FY22 was because of Molnupiravir and that being a Covid drug, demand could ebb off going forward. But Divi’s has not built on one drug and my sense is that Divi’s will sign up for plenty of other products. The relationship that Divi’s has with the top six pharma companies in the world is unrivalled in Indian Pharma.

No other Indian pharma company has that strength of relationship with firms like

, Glaxo, Mylan and I honestly do not have that much concern. Divi’s will have a power packed pipeline given especially what is happening in China. China makes 10 to 20 times more API than India does and my reckoning is this is a clear directive from the highest levels of American government to the American pharma companies to source more from India, less from China and if there is one company that will make money on that redirection of API sourcing, that will be Divi’s.



Read also: In this fall, every day we are buying the same high quality franchises as much as we can

As you can understand, we are delighted about the fact that people sold down Divi’s on the back of this sort of brokerage research. We wanted to capitalise on that. There is a clear restructuring of global API sourcing lines against China in favour of India and our deduction from that is in favour of Divi’s and therefore we remain buyers of Divi’s on a daily basis.

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What is happening within the midcap universe? Do you worry about your midcap portfolio in this selloff? How are you protecting capital in your favourite holdings – GMM, , Garware etc?

Ironically, the midcap companies portfolio – both in terms of before the war started in Russia and even after the war started – held up better than the largecap names. The reason for that is companies like Galaxy, GMM, Garware are $1-2 billion companies and these spaces are not large enough to attract the attention of India’s big ticket promoters or the attention of the venture capital backed plays.

How will you compete with Garware Technical which is the world leader in fishing nets for Salmon aquaculture? It is a very niche space, very specialist expertise and hence nobody tries to enter these spaces and Garware’s ROCE keeps going up year upon year.

Similarly GMM

has 85% of market share in India and 55% globally. It is a 100-year old firm and with the acquisition of Pfaudler, it has very niche expertise and these niches are nicely insulated from competition. They are large but not so large and keeps on peacefully compounding away. Our Little Champs Portfolio has compounded at roughly 30%, it is now going to hit its third anniversary in a couple of month’s time.

If we have to make our anniversary portfolio valid for the next 10 years, what would you like to buy in that portfolio?

I had talked about this six months ago and there are three Indian companies that I thought would become trillion dollar companies in 10 years. Very confidently then and confidently now, I will give you the names of three Indian companies which I think have weight in them to become trillion dollar companies in a decade. These are

,

and

.

TCS and HDFC Bank are relatively safe bets because they are already north of $100 billion and so hitting a trillion in 10 years will not be so tough. Titan is a $50 billion company and it is looking good for another 20 years of stellar compounding. It is compounding at 30% for the last 20 years – both in cash flows and in share prices.

What you have given me is the portfolio allocation for your big portfolio Kings of Capital Allocation. You also have a Little Champ Portfolio. I was looking for a Little Champ Portfolio for 10 years?

So let us try then.

management has done a terrific job in taking a small Indian company and turning it into a mini multinational. Whilst I am sure they will face execution challenges on this path to become a global leader, so far Tarak Patel and the team have executed well. We think they can last the distance and become a global leader in glass lined and ceramic reactors.

is the market leader in Aliphatic Amines in India as we just discussed, the API industry is coming to India. Alkyl Amines is a natural beneficiary there and amongst that Little Champs, if I had to choose one more, I would put Fine Organics, the market leader in emulsifiers. The food additives space is an industry where Fine Organics can do well. Obviously. these companies are small – roughly a billion dollars market cap – but their compounding and their fundamentals are stellar and therefore we look forward to many years of a happy compounding with these little champs.


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