Vmart Share Price | Paushak Share Price: Follow cash & not PAT to make good money in India: Saurabh Mukherjea


“Over the last couple of months, we have held back from our auto and auto ancillary investments. A lot of that money has gone in the smallcap portfolio and to Vmart,” says Saurabh Mukherjea, Founder,
Marcellus Investment Managers.

Saurabh Mukherjea has created a good franchise called Marcellus Investment. You are managing billions of dollars. How can one invest in Saurabh Mukherjea now? I want to invest in Marcellus. How can that happen?

It is the faith of the Indian investor in the country itself.

That is all long talk. Tell me the reason. You are a smart stock picker. How can one invest in Saurabh Mukherjea?
The Marcellus stock, for better or worse, is not for sale at the moment. Five-six years out, maybe Marcellus stock would be available to the world at large. At the moment it is owned by the employees by and large. Jokes apart, whilst the employees own the company, without the Indian investors faith in the country. Remember we have been through three traumatic years, two years of Covid, now all this drama around Ukraine but what is remarkable is the unrelenting faith of the Indian investor in the country itself. FPIs come and go. The local investors stand strong and that has allowed us to build a business where maybe we are able to run a company with 120 people managing Rs 13,000 crore. All of that would not have been happening if the local public in India had not believed in the country’s economy.

Have you got fresh inflows in this market volatility? The mutual fund folks are getting flows. Have you got fresh inflows when markets fell in March?
We were getting around Rs 100 crore a week for most of the last couple of years. When the war with Ukraine broke out, for a couple of weeks it reduced to Rs 50-60 crore a week; but over the last 10 days or so, we are back to the usual Marcellus number of around Rs 100 crore a week coming in.

As you are saying, that is consistent with what we are hearing from the mutual fund industry. The Indian investor has been rock solid. We got FII flows till June-July last year, our foreign client inflows did dwindle through the winter. Over the last couple of weeks, some of our foreign clients have been visiting India again amongst other people. They met us and my reckoning is if the conflict in Ukraine does not escalate, foreign inflows will also start coming back for us and for other people through the course of the summer.

Samir Arora gave a very interesting data point. His data point was that in the last couple of years, the profits for consumer companies have doubled but the prices have tripled – a PE expansion has happened. Now for the first time there is a demand impact and there is a margin impact. So he is making a case that the PE multiples have to contract purely because of the expansion which has happened in the past which has been higher than the earning expansion.
I think the first thing to realise is what drives stock prices is not earnings. What drives stock prices is free cash flows. If you take the typical company that we invest in, whether it is in our Little Champs portfolios which we opened for inflows last week after two years or in our flagship Consistent Compounders portfolio, whether it is in our smallcaps or in our largecap portfolio, what we have seen over the last five years is that profit compounding in India in well run companies tends to be between 15% and 20%.

So if it is a larger company like Asian Paints, Pidilite, the profit compounding is around 15% and if it is a smaller company like say Alkyl Amines or GMM Pfaudler, profit compounding will be around 20%. But frees cash flow compounding is the real driver of share prices. Whether it is an Asian Paints or a Pidilite, large companies’ free cash flows are compounding at 25% even through the last three-four-five years. In the smaller stocks, the Little Champs franchises – as we call them – the free cash flow compounding is around 35%. So this difference is big.

If a company as big as Asian Paints or a Pidilite compounds profits at 15% but cash flows at 25%, it is the cash flow compounding which is driving the stock. Optically the PE multiple will look high because the P is not following E. The P is following free cash flow. I will give you an extreme example. Over the last 10 years, Astral Poly profits are up 5X, free cash flows up 100X, share prices up 100X. We have spent a lot of time explaining this to people that what drives share prices is not profits, Astral Poly’s profits are up 5X in 10 years, free cash flows are up 100X. You need to follow the cash not the PAT and you will make good money in India even though the current fiscal that is going to end today, free cash flows are up very strongly for almost all our investee companies.

In recent times what is it that you bought in the crash? You told us earlier that you accumulated more of Asian Paints and Pidilite but what else?
I might have mentioned before that we have also bought plenty of Dr Lal. We could not make any logical sense of the share price pullback. As we just discussed, PE multiples do not drive share prices and so we bought plenty of Dr Lal over the last couple of months. Our smallcap portfolio is one area where we have to hold our hand up and say we did not quite get it right over the last three years. We in fact told on this programme that auto and auto ancillary would do well. They have not done well and hence over the last couple of months, we have held back from our auto and auto ancillary investments.

A lot of that money has gone in the smallcap portfolio and to Vmart . We have been holding Vmart for two years. Shares have not done much over the last 12 months even but as the unlock proceeds, given the quality of Vmart’s franchise, given the way the retailer has crushed working capital, if you look at Indian retail barring Trent that is Westside, we do not see anybody else managing the apparel business as well as Vmart does. So we have loaded up further in Vmart as we have reduced our auto and auto ancillary investments.

In our larger cap portfolios, we bought more of ICICI Lombard in our flagship portfolio Consistent Compounder. So those have been the two areas where we bought two franchises which we had investments in the past but we have ramped them up over the last couple of months quite aggressively – Vmart and ICICI Lombard.

Axis, a new franchise is buying out Citibank’s consumer business. Axis is looking at M&As to plug holes in its franchise. It has done with Max Life, now it is doing with Citi. What do you make of it?
We have Axis in our Kings of Capital Portfolio. Kings of Capital is our financials only portfolios and we have had it for around two years. Obviously we have had some push back from clients over the last couple of years as Axis has not had the greatest of runs but we persevered partly because we have seen Amitabh build a great franchise at HDFC Life. We also persevered because we have done ground level checks right throughout Covid on Axis’s branch networks, on the people who have been joining the firm, the new people that Amitabh has bought in.

Our view has been that this man is turning around the Axis franchise, he is bringing in good people, he is putting operational rigour. Given that they had spare capital, given Amitabh’s track record, we banked that he will deliver and we are happy to see the deal. We are happy to see the Citibank deal. It will take them two-three years to actually show us the fruits of that deal in terms of better ROEs. But given that they have surplus capital, they seem to have acquired a profitable franchise. We think it is the right deal to do.

We are also quite keen to see more happening on that Axis-Max front where nobody knows banca and the power of banca, selling insurance through the branch networks of a high quality private sector bank. We do not think anybody understands that better than Amitabh and so we are keen to see more happening on the Axis and Max front.

Overall, given how few high quality private sector banks are there in our country, one can count them on the fingers of one hand. In fact we do not even need the fingers of one hand to count high quality private sector banks. We think this is a space in which a strong player like Axis with CASA ratios now approaching 45-47% will do very well in this incipient economic recovery.

What are the hidden gems in your portfolio? Anything of late?
We have already discussed Paushak. We continue building that position. It is a controlled market. Barriers to entry are high. Whilst a couple of other larger companies do make phosgene in India, our reckoning is their capacity constraints in phosgene are considerable and therefore this is your only pure play private sector phosgene manufacturer.

Phosgene is as essential an industrial chemical as chlorine. It is hazardous but at the same time it is essential and therefore we reckon Paushak has been able to make money. We are looking for more smallcap ideas but I will be honest it takes lots of hard work and one-one and a half years of research to nail down a stock which one can invest in.

We are going to be very careful about these investments. In a given year, you will see us making one or two small cap investments and perhaps getting out of one or two strong cap stocks. So Vmart has been a little champ for us, Paushak is now a little champ for us. It is hard to find smallcap ideas with metronomic regularity. We will try our best.

Since you are talking about your little camps I want to know which are the little champs in the last two years V-Mart of course is one that you talked about but which are the other big candidates which really made you those big moneys in the last two years?
So I think as we have discussed I think repeatedly on your channel over the last couple of years I think Alkyl Amines and GMM Pfaudler we first bought it actually first invested in them three years ago but over the last couple of years they have made our clients lot of money. In fact if I look at our little champ’s portfolio in its entirety in two and a half years we have more than doubled client’s money and significant role was played by Alkyl Amines and GMM Pfaudler more recently a company that we invested in two years ago Fine organics is coming through very nicely. We also have high hopes of Galaxy Surfactants and if I look at the financial space Aavas Financiers we think is a lender that can make money for us, they have done well but I think the real upswing in Aavas given that they are well capitalised, well run, and the real upswing in Aavas will come in now that the unlock has happened and the economy has started recovering but I think prior to place in terms of creating wealth for Marcellus’s client should go to Alkyl Amines and GMM Pfaudler.

If Asian Paints and Pidilite are your largecap champion compounders, GMM Pfaudler and Alkyl Amines are in that category, which are these long-term compounders?
The main difference, leaving aside the obvious difference in market cap, where the GMMs and the Alkyl are one-tenth the market cap of a Pidilite or an Asian Paints, leaving aside that obvious difference, the main difference tends to be the institutionalisation of the franchise since smaller companies like GMM, like Alkyl, like Paushak, like Fine Organics the dependence on the promoters is greater, whereas in larger franchises like Asian Paints or TCS, it is far more institutionalised where the family has taken a back seat and high quality managers typically people hired from the IITs and IIMs, when they are in their early 20s and then they grow to run the business that institutionalisation is far more advanced in our flagship investments in consistent compounders.

One of the things we work on quite closely with our smallcap investments is nudging them, prodding them, guiding them to institutionalise the business and encouraging the promoter to play the role of a capital allocator and handing over the day-to-day management of the business to high quality managers. It is not easy to do, these people are hard to find plus it is hard for promoters to let go. But institutionalisation is the fundamental difference between our little champs versus our consistent compounders.



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Divyansh Singh

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