If compounding is the first step towards long-term wealth creation, Saurabh Mukherjea stands out on Dalal Street as a fund manager who has been at it constantly to master the art and science behind it.
Ever since he returned to India after donning a couple of hats in the UK, Mukherjea has been on an rigorous pursuit of excellence. As the CEO of Ambit Capital, he brought in a concept called ‘Coffee Can Investing’, which received instant acceptance on the sheer strength of the strategy he developed. The book he wrote on the same principle by the same name quickly became a best seller.
In 2018, he left Ambit to found his own PMS firm, Marcellus Investment Managers, and launched a couple of strategies, including ‘Consistent Compounders‘ – a strategy loosely based on the same principle of Coffee Can Investing – and then a smallcap-focused strategy called Little Champs.
The way Coffee Can delivered instant results at Ambit, Consistent Compounders did it at Marcellus.
It delivered 20.10 per cent in the last year till August 31, easily outperforming BSE Sensex with a solid margin.
In fact, the scheme emerged as the biggest wealth creator among all portfolio management schemes in 2019, its first year in existence, with 27.40 per cent returns. Little Champs has delivered 40.70 per cent return since inception in August 2019 and 36.10 per cent in last three months.
On Dalal Street, some people call Mukherjea a ‘blue collar’ equity analyst, as in his early days in the Indian market, he is known to have done a lot of leg work in some of India’s old and new industrial hubs like Coimbatore, Kohlapur and Kolkata, trying to understand the underpinnings of Indian industry.
In his public speeches & business TV discussions, he throws up fewer EPS or book value numbers and talks mostly about things more fundamental: people running a business, spread of distribution networks, entry barriers, market share potential etc.
Mukherjea lives by his thumb rule of ‘sustainable growth’. Known as Dalal Street’s most erudite equity analyst & business writer, with several best-sellers under his belt, Mukherjea sounds absolutely sorted when it comes to picking businesses to invest in.
In an interaction with ETMarkets.com, he said he looks for companies that grow at a sustainable pace while maintaining a healthy level of capital.
“Sustainable pace means the company should be getting double-digit revenue growth every single year (say 10 out of 10 years or 12 out of 15 years). This is regardless of the GDP cycle. Besides, the company should have a return on capital of at least 15 per cent, which is the cost of capital in India,” he said.
Such businesses are few and far between in India’s listed market of close to 5,000 companies. Mukherjea is aware. He says there are hardly 20-25 companies in India that pass this simple test. Yet, he applies more filters to it.
“Once you get the list on the basis of the given criteria, then you look for companies with very high entry barrier. This can be due to regulations, specific technology etc. One should also screen out accounting fraudsters,” he said.
In a good year, you may get 25-26 companies and in a bad year, only about 15-16, he says.
He insists a portfolio comprising such stocks can deliver returns in the vicinity of 20 per cent and work well both in a bull or bear market.
Last month, when the entire market was going gaga over Reliance Industries, the Mukesh Ambani-promoted conglomerate that is in the process of making a transition from its traditional energy & petchem businesses into consumer-facing telecom and retail with the backing of several global tech giants and private equity investors, Mukherjea told a TV channel he does not prefer the stock.
“When return on capital is consistently below the cost to capital, it becomes a speculative investment for us. We manage life savings for the best part of 3,000 families, and cannot speculate with people’s hard-earned money. So return on capital above the cost to capital is an essential prerequisite for us to invest. When we see that, we take a good hard look at the company and sometimes we invest and if we do not see that, we stay away,” he said.
Stocks held in Mukherjea’s portfolios tell a story.
Currently, Marcellus’ Consistent Compounders portfolio has five stocks enjoying a cumulative 48.80 per cent weightage – Asian Paints (12 per cent), HDFC Bank (10 per cent), Bajaj Finance (9.50 per cent), Page Industries (9 per cent) and Pidilite (8.30 per cent).
“Entry barrier is the foremost thing considered here,” says Mukherjea about the five companies.
He says the team at Marcellus does research on a company for up to two years before taking a position on a business. “By the time we build a position, we would have met 15-20 people who know the company extremely well, including former employees, suppliers, competitors, distributors and former auditors. We normally do a long discussion with them. Once we figure out that the entry barrier is very high, we take a larger position,” he said.
He says HDFC Bank attracted his team because its Casa (current account-savings account) franchise is impossible to break. “This bank has the lowest cost of fund in the private banking space. Our research showed that this is hard for any other bank to replicate this kind of cost of fund,” he said.
Two companies from the paints sector — Asian Paints and Berger Paints – find place in Marcellus’ portfolios. The logic? The two earn 85 per cent of total industry profit.
“Rivalry between these companies is almost stable. For 20 years now, Berger is consistently one-third of Asian Paints. Return on the capital of both is significantly higher than the cost of capital for almost 20 years. It is very rare to find top two players consistently holding 85 per cent market share. Both the companies are enjoying the benefit of a barrier to entry,” says he.
When to book a profit?
Such is the conviction in the stocks the team picks, Mukherjea says they rarely book profit.
But when the red flag goes up, they go for a complete exit. “If there are changes like management rejig, structural changes in the industry and some corporate governance issues in a company, then we do not shy from selling the entire stake at one go,” says he.
For instance, Marcellus sold its entire stake in Gruh Finance when Bandhan Bank acquired the non-banking finance company in 2019. “Price is not the paramount thing for us when it comes to making a ‘sell’ decision,” he added.
Targets for benchmark indices
Mukherjea has often been vocal that Indian equity indices do not represent the true characters of the economy, which is what deprives investors from drawing the real benefits of India’s economic growth through the equity route.
“The benefit of economic growth can be very narrowly concentrated in a handful of well-run companies with very strong competitive advantages,” says he.
Which is why the Dalal Street veteran does not believe in setting Nifty and Sensex targets. “I do not prefer to buy the whole vegetable market, if I can pick the best things required for dinner,” says he.
“Around 35 companies of Nifty50 pack haven’t delivered a return on capital above their cost of capital even once in last 10 years. Accounting practices of almost 60 per cent of Nifty companies are questionable. Only a few Nifty companies pass that definition of being well-run and have strong comparative advantages. Many Nifty companies have failed to build strong moats over a long period of time,” Mukherjea says.
At the same time, the market maven says the art of investing is to be able to foresee who is going to be thrown out of the Nifty pack over the next 10 years and who will replace them. “If you can do this, you can outperform every investor in the country,” he says.
Data since 1995 shows Nifty has been seeing a churn in 40 per cent of its constituents every decade, he said.
Investing opportunities amid Covid-19
In a recent interaction with ETNOW, Mukherjea said every sector is consolidating into the hands of one or two champion players, while hundreds of other companies are getting washed away.
“The well-run, efficient, well-capitalised companies will consolidate market share and that in turn would mean difficulties for hundreds of others,” he said.
Journey so far
Marcellus Investment Managers was incorporated in August 2018. Before that, Mukherjea was the CEO of Ambit Capital and played a key role in the broking house’s rise as a brokerage and wealth manager. When Saurabh left Ambit in June 2018, it had assets under advisory of around $800 million.
Mukherjea did his BSc and MSc in Economics at the London School of Economics. He is known as one of the best-selling financial authors in the country with several titles to his credit: Gurus of Chaos (2014), The Unusual Billionaires (2016), Coffee Can Investing: The low-risk route to stupendous wealth (2018) and The Victory Project (co-authored with Anupam Gupta) (2020).