'The consolidation of the world's fifth-largest economy in the hands of 15-20 corporate giants is a once-in-generation event, which we are focusing on.'
With the markets near their record highs, picking the right stock is essential to maximise the portfolio return.
"Losing sleep on where share prices are on a day-to-day basis is a secondary issue in such circumstances," Saurabh Mukherjea, founder and chief investment officer, Marcellus Investment Managers, tells Puneet Wadhwa.
How vulnerable are the markets to a meaningful correction now? What are your key concerns?
We don't focus on the broader markets because of the polarised nature of corporate profitability in India -- 20 Indian companies now account for over 90 per cent of profits (up from 30 per cent a decade ago).
Most of these 20 companies are growing their free cash flows (FCF) at over 25 per cent per annum, despite the challenging economic circumstances in the past five years.
The consolidation of the world's fifth-largest economy in the hands of 15-20 corporate giants is a once-in-generation event, which we are focusing on.
Losing sleep on where share prices are on a day-to-day basis, we believe, is a secondary issue in such circumstances.
How do you see the liquidity situation playing out globally against the backdrop of the FOMC (Federal Open Market Committee) meeting? Will India still be on the investor's radar?
We manage for around 8,000 hardworking Indian families and some Western endowments.
Their focus, too, is on benefiting from the ongoing consolidation and formalisation of the Indian economy.
Given that, our investment philosophy is simple -- Step 1: Look for companies whose books are clean; Step 2: Look for companies that allocate capital sensibly especially in the context of selling essential products; Step 3: Look for companies that are utterly dominant in their sector.
Neither our clients nor we spend too much time second-guessing what central banks will be doing.
Our both Indian and Western clientele are keen to invest continuously and benefit steadily from the consolidation of the economy in the hands of 15-20 firm.
Have there been additions in the past 12 months to the stocks that you shortlisted based on the three above-mentioned steps?
We have added Titan and HDFC Life to our portfolios over the past year, as they fit the three classic Marcellus' pre-conditions for successful investing.
Gold in our country is an essential purchase for almost all families and Titan is already the largest jeweller in the country, by far, with a massive growth runway.
HDFC Life is the best-managed life insurer in the country with strong competitive advantages around superior use of customer data.
Much as the private sector banks continuously benefit from the steady drop in PSU banks' market share, HDFC Life will benefit from a similar dynamic in the life insurance sector.
Are the markets in for a rude shock as regards inflation?
It is obvious that as the global and the Indian economy sees a broad-based recovery, inflationary pressure is coming through very strongly as shortages develop for everything -- from skilled labour to shipping containers and semiconductors.
Across the world, the supply-demand mismatch is fuelling inflationary pressure.
In such circumstances, contrary to the popular notion of high-quality stocks taking a beating, history shows that such companies have outperformed the broader market, even more strongly (when CPI inflation exceeds 6 per cent) on revenue growth, profit margins and shareholder returns.
This construct bodes very well for the sorts of portfolios we manage.
Do you see pent-up demand getting released over the next few months ahead of the festive season or have the rising commodity prices and the second wave of Covid punctured the spirit?
Our three-step approach to investing does not focus on short-term factors like what central banks are doing or what will do well in the festive season.
Our portfolios are built around companies selling essential products and services like footwear, blood tests and medical testing, pharmaceutical products, basic financial services like insurance and retail loans, baby milk powder, undergarments, etc.
In a country like India, these products are perpetually in demand regardless of whether Covid is waxing or waning, regardless of whether we are in the festival season or not, and regardless of what the Federal Reserve is doing.
How are you looking at new-age businesses post the Zomato IPO?
In some of our portfolios, we are longstanding investors in Info Edge, which, in turn, invested in Zomato many years ago when Zomato was in its infancy.
We don't invest in companies at the IPO stage. We wait for a company to build a 10-15-year track record of profitability and cash generation before we even consider investing.
Real estate stocks have done well over the past year? Are you invested in any?
We have no view on the real estate sector as we haven't found too many real estate developers who meet Marcellus' classical three-step criteria for successful investing.
Buying a flat to live in Mumbai is hard enough. Buying a real estate stock is harder still and something that we have never managed to do.
Feature Presentation: Rajesh Alva/Rediff.com