The hardest investing setback for Saurabh Mukherjea, founder of Marcellus Investment Managers, came not from a complex business model or a volatile sector, but from Relaxo Footwears - a company that lost its edge after aggressively hiking prices after the pandemic.
“It was actually, if you ask me, the hardest learning of them all, was Relaxo,” Mukherjea said on The Wealth Formula podcast, in conversation with N Mahalakshmi. What seemed like a safe bet on an essential product during the pandemic turned into a costly misjudgment as the company stumbled once normalcy returned.
During Covid, demand for basic footwear surged. “Relaxo, chappal is an essential product. So, we thought that there will be a base level of demand that will sustain after Covid,” he explained. But the post-pandemic landscape brought an unexpected squeeze. As oil prices climbed, the company raised prices sharply. “During Covid, remember it was selling at the entry level chappal at 85. And then a year after Covid, the entry level chappal was 150, 160,” Mukherjea said.
That decision ceded ground to the informal sector, which makes ultra-cheap slippers by melting plastic milk packets. “Obviously those chappals are Rs 50-60. So, if the organized player is at Rs 80 and the milk packet chappal is Rs 60, the public said we’ll buy the Rs 80 entry level chappal. But if the organised player is at Rs 150, right, and Rs 60 for the informal sector product, then the market shifts,” he observed.
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The misstep was particularly jarring given Relaxo’s track record. “You could have a company which has historically made very good decisions, very good corporate decisions, enriched shareholders to the tune of 100x I think in the preceding 20 years, and then make strategic misjudgments which cost them and cost us,” he said. More than two years after selling the stock, Mukherjea said they still “haven’t quite got their mojo together.”
The lesson was humbling, but Mukherjea said it came alongside other valuable experiences. “In my investing career if somebody had told me when we set the firm up in 2018… you have a portfolio of HDFC Bank, Divis Lab, Dr Lal Path Labs, Asian Paints, and these sorts of quality franchises and still in 15 months the portfolio will fall 15%... I would have said, nahi ho sakta. But we lived through it,” he said. Holding a portfolio of such marquee names was not enough to prevent a sharp drawdown in 2022, Mukherjea said.
The takeaway, he added, was to respect market cycles. From 2016 through 2021, Marcellus’ portfolios compounded at 25% annually, against 18% for the broader market, powered by mid-teen earnings growth. “Life has now taught us that you now need to expect a reversion to mean and adjust and factor that in,” he said.
Still, of all the lessons, it is Relaxo that left the deepest mark, according to Mukherjea. “The fact that a franchise which was doing ever so well for 10-15 years, starts then regressing… that was another big learning. And in a way, perhaps the most painful of the learnings.”
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