March 5, 2024

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Saurabh Mukherjea: Market may hit several all time highs in 2023: Saurabh Mukherjea

Saurabh Mukherjea: Market may hit several all time highs in 2023: Saurabh Mukherjea

“I think 2023 will continue to bring good economic news, more foreign money and domestic flows. So I would not be surprised if the all time high story “sustains” right through the next 12 months,” says Saurabh Mukherjea, Founder, Marcellus Investment Managers.

PSU banks are leading the price action and good old cyclicals are making a comeback but classic compounders like , Kotak, IT all of them are taking a backseat? What is your view?
Look none of these is unexpected. We have got a situation where foreign investor inflows are picking up just in the last couple of months. I think the market should hit several all time highs and also in these sorts of circumstances when you have an economic pick up and foreign money starts coming in the sorts of companies you mentioned, they tend to do well.

PSUs like

, have had a terrific run. State Bank of India is a classic play for early stage of an economic pick up. I think 2023 will continue to bring good economic news, more foreign money and domestic flows. So I would not be surprised if the all time high story “sustains” right through the next 12 months.

Do you still continue to believe that the choice of stocks which you are betting on whether it is private banks or a classic like and is the way to invest? The reason I am asking you this is because that style of investing of late has drawn a lot of criticism?
We are not here to garner popularity. Our job is to look after client’s money carefully. We have doubled our client’s money net of all fees and that is roughly 19% compounding at a time when the Nifty has done around 15%.

If you follow our style of investing you will get a decent result significantly ahead of the Nifty after all fees. Now obviously in that process you will go through periods where I think the last 12 months we are up 1% and the Nifty is up 6% to 7% on a total return basis. You will go through periods of underperformance but people like us have to be pretty relaxed about that if we sort of every day woke up in the morning and said aaj index ko beat karna hai we will also end up buying things like

and Coal India which is not a good way for us to manage the public’s money.

So I have been here before and I have been doing this for 20 years. I have seen these cycles, we understand why

or a Coal India has done well for the last couple of years but to our mind the stock price is not the true reflection of a company’s performance on a short term basis.

Just to take an example, HDFC Bank stands out head and shoulders above SBI and if somebody wants to get into the fundamentals of it, HDFC Bank and SBI have the same ROE.

HDFC Bank delivers the ROE as SBI on a half the debt equity and I think that tells us as fundamentally oriented investors everything we need to know about an HDFC Bank. So we stay calm, do what we have done for a long period of time and that is how we protect our client’s money and get them decent compounding.

Anything within PSU where you find comfort to buy still or have already invested?
There are two reasons why we historically avoided PSUs and we continue to avoid PSUs. One is there is a fundamental conflict of interest, there is a tension inside the PSUs construct. The PSUs are owned by the Government of India and quite rightly therefore the PSU prioritises the interest of the nation over the interest of the shareholder. We think that is a perfectly valid imperative.

Defence PSUs owned by the government to protect the nation is not owned by the government to deliver returns for Marcellus’s clients. So the first reason for avoiding PSUs is the inherent tension in the PSU construct and that does not make us feel very comfortable as shareholder. The second aspect is if you look at the fundamentals of PSUs and take any PSU return on capital it tends to be significantly below cost of capital over extended periods of time which means the value creation engine is missing.

Now I can get very wrapped up in PE multiples and PB multiples and buy these things but basic financial analysis tells us that if a business lacks a value creation engine it is difficult for me to put my clients’ money at work and expect a return.

It might come through from time to time but that is sporadic and that is speculation rather than investing so those are the two reasons for staying away from PSUs.

So any new little champs that you have been scouting for your investors?
Not a little champ but the reverse actually. Some of our advisory portfolios over the last couple of weeks have bought

and we think this is the right time. We have historically had which we continue to have and again I get very amused when I see brokers sort of say underweight IT or underperformance in IT is coming up because that is like saying take a short position in steam engines at the heart of the industrial revolution.

Everything we are seeing in the world around us suggest that the whole world especially the western world will have to automate further.

So we have used the whole scepticism around IT and put Infosys in our advisory portfolios and we continue with that TCS holding in our flagship product.

Shareholders of a lot of these companies will be taking comfort from that commentary especially in light of the fact that of late IT has been under the weather to put it mildly. So other than that let us also understand your outlook on the entire consumption space because perhaps the only niggling concern or point of contention is that are those hefty valuations justified?
I think in consumption it is worth drawing the bifurcation right. We have the tightest job market in Indian history in formal employment. I have never seen anything like it. Whichever part of Marcellus I look at whether it is technology, compliance, finance, operations, research, getting good people is getting tighter and tighter because the job market is so super hot which means obviously elite consumption stuff like apparel, consumer durables will smell of roses and I do not think there will be a challenge through 2023 on earnings growth there.

But the challenge lies in the informal sector which has been pulverised over the last three four years now and this high inflation is hammering the informal sector even more because there is no stimulus around unskilled employment in India.

Unskilled employment is a challenge and therefore in our portfolio I can see companies which are a play on small ticket mass unskilled consumption. There is a general challenge in the country so whether you look at the FMCG companies results or say in our portfolio the little champs are barely seeing any growth.

We are trying to do more work to see if there is any reason to believe that in 2023 there will be a miracle and there will be a pickup in mass consumption. At the moment that is where our concerns are greater. In class consumption middle class affluent people I think we have got a rocking story at the moment.

What about defence as an opportunity because a lot of those stocks have certainly been the cynosure of all eyes?
I think this is an area where we are hoping that there will be some companies we could buy. The cash flows of the private sector players in defence tend to be quite weak partly because working capital cycles are quite extended and it takes time to get paid if your customer is the government and bargaining power of private sector defence players is also quite weak.

So whilst we have some private sector defence players if we look at their performance free cash flows, making money tends to be a challenge and hence hitherto we have never made investments in the sector. But we will carry on looking hopefully as India indigenises its $70 billion of defence span which currently goes overseas. As India indigenises then we might get some local companies to actually make some money out of supplying defence to the armed forces in our country.

You folks decided to exit which has given a 57% return year to date so far. What is the rational for that? Can you explain, why is it that you may be changing your mind on ITC or have you not changed your mind as the stock is almost at Rs 350?
ITC we actually exited last year largely because they have a massive cash pile for obvious reasons. Their cigarette dominance makes them the best part of a billion dollars of cash a year but we exited it because we could not quite see how they were going to deploy that in almost cash pie and to this day we stay on the lookout for a positive announcement from Mr Puri or the broader board at ITC.

We stay on the lookout for more positive announcement from them as to how they use their cash pile which I think is now the best part of $4 billion. It is one of the most formidable cash piles in corporate India. Its dominance in cigarette is unquestionable but unless they use the fruits of that dominance which is this enormous pile of free cash flow unless they use that constructively for shareholders it is difficult for us to see where the long term compounding engine lies there.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)