Still not ready to move into Reliance & Nykaa but going strong on Relaxo: Saurabh Mukherjea

“We are very pleased to see what has done and we do not mind taking a few quarters of profit margin drops and EPS going backwards. Ramesh Dua is an extremely smart promoter who can use opportunities such as the ones presented over the last 9-10 months of rising input costs to pressurise the competition and get competition to shut shop,” says Saurabh Mukherjea, Founder, Marcellus Investment Managers.



Will Saurabh Mukherjea ever sell or ?
We continue being large holders in . We continue to believe that a huge part of the western IT opportunity is yet to come to India. It is only one-third of the way through the IT journey. A subset of that opportunity is engineering R&D and L&T Technology Services. This is on the basis of what I heard in the west. As western companies struggle to find science and technology talent, engineering R&D seems to be a natural industry for India.

Think of engineering R&D as the IT services sector but with a 10-year lag. It is where IT was a decade or so back. I believe there is a very bright future for firms like L&T Technology Services. In the specialty chemicals,

and the entire value chain starting with Divi’s and API firms like and intermediates and in manufacturing glass lined reactors. They continue ramping up on all of these stocks.

I have been pleasantly surprised by how kind the market has been to us in Divi’s Lab. We continue to bulk up on Divi’s. We believe it is a company ideally placed to capitalise on the opportunity that the changing geopolitics is presenting. Here’s a disclaimer. my parents, myself and our 10,000 clients have exposure to all of these names that I just spoke about.

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Are you willing to change your opinion on yet?
We continue to be impressed by how they are executing on the telecom opportunity. Till five-six years ago, this was not a telecom company. It is remarkable to see that in the space of five-six years, a giant telecom business has been built but its the free cash flows that we look for and whilst the free cash flows remain elusive, we will keep tracking the stock without actually investing there.

One of the stocks you own is Relaxo. The stock market is punishing Relaxo with a 67% drop in profit. What is your strategy? Will you continue to hold on to it? Long term, what is the outlook?

We are very pleased about the price cuts. We have actually met Ramesh Dua ji earlier in the quarter and we have made it very clear that we wanted to see Relaxo go aggressive on pricing. We want to see all our investee companies absolutely crush the competition. Our point to all our investee companies is that if the input prices go up, when input prices go up, you as a Marcellus Investee company should cut prices so that the competition gets wiped off the table.

We are very pleased to see what Relaxo has done and we do not mind taking a few quarters of profit margin drops and EPS going backwards. Ramesh Dua is an extremely smart promoter who can use opportunities such as the ones presented over the last 9-10 months of rising input costs to pressurise the competition and get competition to shut shop.

We are delighted to see what Relaxo has done over the past quarter and hoping to see further consolidation in the footwear sector.

Lastly, footwear remains an industry where 60-70% is still informal. We need to see those informal guys getting compressed, getting pushed up so that investee companies like Relaxo prosper.

Did you use the recent sell off in the new age companies to stack up on any of the stocks? Can these be your champions?
We remain on the lookout for new age companies which are actually building a real business.

falls in that category and so kudos to the team for focussing on operating profits and cash flows. It is difficult to find too many new age companies like that.

I continue to monitor Nykaa. Too many other new age companies are not worth monitoring. Most of these business models are not actually business models at all. They are fund raising models and hence we will keep away from them. But yes, we will continue monitoring Nykaa to see how that franchise shapes up.

In new age companies the world over, the attrition rate, the survivor rate tends to be quite low. So I think India will see the same as the cost of capital carries on rising globally as the funding for new age companies continues.We will see a lot of consolidation and a big clean out there and we are on the lookout for our investee companies capitalising on that.

We are on the lookout for Marcellus Investee companies pushing into the spaces where American Venture Capital or Soft Bank money or Alibaba money had funded Indian ventures.

As interest rates move higher, base effect would kick in. Is there a risk in consumption in the next 12 to 18 months? If there is an inflationary infused slowdown, it could impact , Asian Paints, Relaxo and some of the large companies you have invested in?
We have a consumption concern but it is a little different from what you are articulating. We are not concerned about the middle class or affluent consumption. So will Royal Enfield carry on growing rapidly? Yes, I think it will. So will

and so will our investee companies because formal sector job creation in India is running at a rapid rate and pay hikes are also growing at a rapid rate. So, middle class India is blooming and I think that story will continue. Our concerns are getting exacerbated by the passing quarter in low income consumption because the entire global inflationary surge is punishing low income people even more. They got punished through DeMon and Covid and now this inflationary surge is a real killer. We can see that in the weak results that the FMCG companies are producing. We can see that in the weak volume growth that the two-wheeler manufacturers are producing. That is where there is a little bit of a challenge in India.

It is obviously a challenge for our politicians as well. Job creation for low income people is tough in India and on top of that, inflation is pounding their purchasing power. That’s why I am delighted to see Relaxo going on the offensive and cutting prices. That will make a real attempt to consolidate the low end of the footwear market.

You have remained quite bullish on select auto ancillary names but said that was one of the only credible players in the premium market. You are avoiding the likes of a Maruti as well as an M&M due to concerns on pricing power. Does that thesis still hold?

The car market has come back nicely post Covid.. The challenge in cars has been if you look at the data for the last 20 years,it is a cycle with four-five years of decent volume growth of say 20%, 25% and then three-four years of utter famine. It is very difficult for us to predict it right.

If you take a cross cycle volume growth picture for any of the car manufacturers, you end up with numbers around 10-11-12% which do not really move the needle for us or our clients. So cross cycle Indian auto tends to be a tough thing to buy.

Those who can time the cycle by all means enjoy the fruits of being invested in Maruti in a tough cycle and if you have the patience to figure out when the volume cycle will conk off, get out of Maruti. Unfortunately we do not have that sort of skill set.