Foreign investors to return to India if Fed stops hiking rates, says Mukherjea of Marcellus

Saurabh Mukherjea

Saurabh Mukherjea, founder and Chief Investment Officer of Marcellus Investment Managers, spoke about the current market situation and the way forward along with some of his portfolio stocks and Federal Reserve interest-rate hikes in a recent conversation with CNBC.

What is your view on Tata Consultancy Services (TCS) numbers and the way the market reacted to them? 

The numbers of TCS are very good, as per my understanding. If we see around the globe, it is clear that we are still having the Russia-Ukraine war going on. Several banks in the US are also suffering. Now, if in these kinds of circumstances, a company can show 15-16 percent topline and bottom-line growth, along with a 25 percent operating margin coupled with a record quarter for deal wins nearing $10 billion, what else can you hope from a company which has consistently compounded wealth for the past 40 years and today is the second largest IT services company. The results hence give us confidence and last year we even increased our stake in the company.

What all investors need to realize is that good companies always give conservative guidance. Whereas bad companies give aggressive guidance on results and then disappoint later on. TCS, being a good company, is a considerable part of our portfolios. It has investments from me, my family and our 10,000 clients.

Still growth has moderated and even Infosys numbers were not up to the mark. Do you think the valuations currently in IT stocks are justified? 

These companies i.e., TCS and Infosys, are growing free cash flows by 20 percent on a consistent basis for the last 20 years. It is to be noted that the cloud transition in the world is yet to be completed, with only 1/3rd of the process been completed, whereas 2/3rd of the same is yet to be completed. The Western world lacks adequate skilled labour to complete the task at hand whereas in India we have abundance of the same.

So, if TCS and Infosys compound free cash flows by 20 percent for the next 15 to 20 years it will easily mean that the fair value of these stocks is nearly double what the current share price is. It is like getting an asset worth Rs 100 in just Rs 50. Therefore, as far as my knowledge is concerned, one should buy in this kind of an environment and not panic-sell.

What about the pharma sector and Divi’s lab stock, what’s your take? 

For us higher the margin of safety in a stock, higher is the position sizing in the same. Now, around one year ago the size of Divi’s lab stock in our portfolio was around 3 percent. As the stock corrected in 2022 and lost nearly half of its value, we increased our holding of Divi’s lab in our portfolio to 8.5 percent.

We believe that the Divi’s lab stock has no fundamental issues attached to it. The company has broken into the top three API (Active Pharmaceutical Ingredient) producers in the world. Nearly all the major US pharma companies, rate Divi’s lab pretty highly and give this company a rating of 10 on 10, as the most reliable supplier of large-scale APIs.

Hence, we have increased the stake of Divi’s lab in our portfolio, but we cannot time the market. No one knows when the next rally will come. Divi’s, as per us, came out stronger from the pandemic than it was before the pandemic broke out.

Fair enough, what about Asian Paints, what is your take on the earnings of this company? 

Honestly speaking, no one needs any advice on Asian Paints. It is a company which has given 10x returns in 10 years and 100x in 20 years. Whereas it has given a return of 1000x in 30 years. Since IPO the stock has given a return of 24,000 percent. So, we have not seen many consistent compounders matching up with Asian Paints in the Indian stock market history.

It has been consistently observed that short-term traders sell Asian Paints as the price of oil rises. Whereas for Marcellus Investment Managers, it is exactly the opposite. We buy the stock when it falls due to escalation in oil prices. It is also to be noted that Asian Paints has grown from strength to strength since the coronavirus pandemic broke out. They came out with three different kinds of profitability drivers blazing. The distribution channel also doubled.

Please let us know about any recent interaction which you have had with a management? 

We have just added a new stock in the Kings of Capital portfolio over the last two or three months. The name of the stock is Prudent Corporate Advisory Services Ltd. This company provides a platform to mutual fund distributors and insurance selling firms. This platform nearly has 25,000 distributors attached to it. This is a cash generative business which has immense competitive advantage.

Sure, so are you still confident with regards to Page Industries given the competitive intensity? 

If we look at competitors of Page in the undergarment business, we have Aditya Birla Fashion Retail along with several other listed players. The reality is pretty evident in the results of Page Industries over 2020, 2021 and 2022. Page has dominated peers in the men’s undergarment business. Whereas the company is now focusing on children’s undergarments and looking to compete with global players active in India.

The same is evident in the stock performance. If you look at the stock from June 2019 to June 2022 the stock has nearly tripled. So, we hold the same conviction in this stock and its management as they continue to do good work.

Have you added any new stock in the mid-cap segment in your portfolio? 

So, we have added Divi’s Lab in the rising giant's portfolio since the stock halved in value last year and so did its market capitalization. We also have Infoedge, Cholamandalam, ICICI Lombard etc., they are all a part of our rising giant's portfolio. See, what is happenings is that across all our portfolios on a Year-on-Year basis, the profit is up around 25 percent. Portfolios where we are down say from 10 to 20 percent. This for us again means that the current turmoil in the market is giving a wonderful chance for investors to buy stocks cheap.

Fair enough, so what is your take on the market currently? 

Since the last one-year, domestic investors have helped the market considerably through their investments in mutual funds. This has happened when the response of the foreign investors has been lukewarm. The Indian markets hence have been able to sustain themselves due to strong domestic flows.

Now it appears that the domestic flows have weakened to an extent and the market anticipates the arrival of foreign investors. So, if the Federal Reserve stops its aggressive rate hiking campaign, then I believe that the foreign investors are going to return to the Indian equity markets. They will leave China and come to India.

To give a number to the same, it is to be noted that nearly $3.5 trillion is the investment of foreigners in the China markets. Whereas the same figure for India is only $0.6 trillion. This means even if just around $1 trillion from China comes to India over the next 5 years, this would mean an addition of around $100 to $200 billion in India every year. Such inflows are going to give our markets a leg-up and take the index higher over the next few years.

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