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Saurabh Mukherjea on Indian economy, earnings & why small-cap firms are becoming bigger

If the cost of capital remains low in India and if the country can continue improving its road, freight and ports infra, we will continue to see the rise of small-cap Indian companies with global monopolies, says Mukherjea

March 10, 2021 / 12:21 PM IST

Saurabh Mukherjea is a veteran of the Indian capital markets. He is the founder and chief investment officer of Marcellus Investment Managers. Mukherjea is bullish about the Indian economy, saying that four times in the last 40 years, a US recession along with falling US bond yields and declining oil prices has been followed by a strong economic recovery in India.

Mukherjea says if the cost of capital remains low in India and if the country continues to improve its infrastructure, it could trigger the rise of smallcap Indian companies that have big market share in other global markets.

Here are edited excerpts from his interview with Moneycontrol’s Kshitij Anand:

Q) The Big event which impacted the market was Budget 2021. The RBI policy was just an extension of the Budget and reassured that India stays on the growth path. Do you think the Budget checked all the boxes?

A) The big surprise in the Union Budget was the Government’s willingness to gamble on the budget deficit. Not since Pranab Mukherjee’s 2009 budget, have we seen such an aggressive budget.

The difference however is that whilst Mr Mukherjee ramped up the Governments’ revenue expenditure (especially on NREGA), the NDA Government has stepped up capex.

Whilst the real economy will, in the near term, benefit from the expansionary nature of the budget, for these gains to be long lasting, we need to see tangible progress in asset monetisation and privatisation by the Government.

If they can pull that off in the post-Covid world, then the 1st Feb 2021 budget will go down in history as a turning point in the socialist orientation of the Indian state.

Q) Why was Marcellus so confident from March 2020 that the Indian economy would recover sooner than anybody was expecting when most domestic and global agencies were fearing the worst?

A) As pointed out in our 22nd March 2020 blog, four times in the last 40 years, a US recession alongside falling US bond yields and falling oil prices has been followed by a strong economic recovery in India.

In fact, India has never witnessed an economic recovery without a US recession preceding it! Now, all three conditions for an Indian economic recovery – a US recession, smashed crude prices and falling US Government bond yields are – in place.

Our portfolios – Consistent Compounders, Little Champs, and Kings of Capital – are ideally designed to capitalise on such an economic recovery.

Q) Strong companies are getting stronger: what do the strong Q3 FY21 results imply for the sorts of high quality franchises that Marcellus invests in?

A) We noted in May last year and again earlier this year that profit concentration in India is increasing rapidly.

The top 20 profit generators in India (“the Leviathans”) now account for 90% of the country’s corporate profits. Beyond dominating the country’s profit pool, the Leviathans also reinvest these profits far more efficiently back into their businesses.

By doing this over the last 25 years, the Leviathans have also widened the RoE gap between them and India Inc. Anyone who wants to succeed in the Indian stock market should therefore be focused on: (1) assessing how long the current Leviathans’ dominance can last; and (2) identifying the next generation of Leviathans.

Our portfolios are intended to help investors lock into the country’s most powerful profit engines. Profit growth for our investee companies has been around 30% per annum in recent quarters with almost every company we have invested in gaining market share.

Q) Time to load up on Power, Infra, Construction and Real Estate -- that’s what most fund managers are saying. Does Marcellus agree?

A) The last decade has shown that investors are setting themselves up for disappointment by investing in companies with poor governance, poor accounting, broken balance sheet, and poor free cash flow generation.

In part, these issues aren’t the fault of companies in the Power, Infra, Construction and Real Estate sectors; they are simply casualties of a very complicated 3 tier regulatory system (centre, states, local govt plus various regulators at the sectoral level).

However, the outcome for shareholders tend to be adverse. These sectors shine briefly like fireflies and then they run out of steam. If you want thoroughbreds that can compound for you year after year, decade after a decade you need to look at clean, well-run monopolists selling essential products to 1billion Indians.

Q) Smaller companies in India are becoming monopolists with market caps of no more than $1bn: why is this happening in India? What explains this trend?

A) We are seeing this happen frequently in our Little Champs portfolio. This is partly the result of smaller Indian companies raising their game on R&D, on tech-driven cost & supply chain efficiencies, and on hiring better quality people from good universities.

However, factors external to India are also helping, most notably the gradual exit of China from some sectors like specialty chemicals and lower-end light industrial manufacturing.

If the cost of capital remains low in India and if the country can continue improving its road, freight and ports infra, we will continue to see the rise of small-cap Indian companies with global monopolies.

Q) Marcellus’ Financials focused Kings of Capital Portfolio was launched in July 2020 when everybody was running away from Financials – why did Marcellus launch this portfolio and how is it doing?

A) This is linked to the previous point I made – about us spotting in March 2020 that the Indian economy was likely to recover in 2021.

Since Financials are a natural play on an economic recovery, it made sense to launch a concentrated portfolio of the best Indian lenders, the best insurers, and the best wealth and asset managers.

However, there are structural forces also at work which we have locked into with our Kings of Capital portfolio – notably, the financialisation of savings in India.

Two years ago we pointed out to our clients that amidst the gloom & doom of the economic downturn, we continued to see weekly inflows from small-town India into Marcellus’ funds.

More generally, equity inflows into mutual funds are holding up as are insurance premiums written by even third rung insurers. Our trips to small towns suggest that such flows point to a broader shift taking place in the Indian economy.
Q) What is the way forward – any new product which Marcellus plans to launch in 2021?

A) We have been conducting in-depth research on a couple of products. We are now going to seed these products with the firm’s money and assess live performance with real money.

Only once these products are tried and proven will we bring them to the market in FY22.
Q) How do you sum up the year 2020 for Marcellus and your key learnings which pandemic has taught?

A) Don’t get greedy and don’t panic. Think for yourself. Do back-of-the-envelope maths in your mind and gauge the risks and rewards for yourself rather than being swayed by media headlines or by what other fund managers are saying.

This job is mainly about staying calm, day in and day out, year after year. When others get greedy or too excited or too scared, that’s when we find the biggest opportunities.

The views and investment tips expressed by experts on are their own and not those of the website or its management. advises users to check with certified experts before taking any investment decisions.

Kshitij Anand
Kshitij Anand is the Editor Markets at Moneycontrol.