Saurabh Mukherjea has often frequented the Morningstar Investment Conference in Mumbai as a panellist.
On one occasion, Sanjoy Bhattacharyya, Managing Partner at Fortuna Capital, posed a question. He asked him which camp he belonged to – the bears or the bulls. To which Saurabh replied, “I’m in the camp of making money for my clients. Irrespective of the market, I need to make money for my clients.”
Another time, he told veteran investor Ramesh Damani that “a very small set of listed stocks make money. The bulk do not even beat the rate of inflation. And since the Indian stock market is volatile, stock picking must be done diligently.”
He went to explain that he looks at four broad points over the years.
- Are revenues overstated (P&L account)?
- Is the balance sheet overstated?
- Is the promoter stealing?
- Has the auditor been bribed?
Saurabh Mukherjea is an author and the founder of Marcellus Investment Managers.
Below are some interesting insights from two of his blog posts: The remaking of Indian capitalism and How the Nifty will change in the coming decade.
Concentration of profits in corporate India.
The 20 most profitable firms in India now generate 70% of the country’s profits, up from 14% thirty years ago.
The rise of India’s networked economy (highways, cheap flights, broadband, GST) has allowed large, efficient firms to use superior technology and better access to capital to squash smaller competitors.
In line with what is being seen in the U.S., the growing dominance of a handful of very large companies in India is changing the template of capitalism in India.
India is already an economy with extraordinary levels of profit share concentration in many key sectors. For example, we already have one or two companies accounting for 80% of the profits generated in the sector.
- Paints (Asian Paints, Berger Paints)
- Premium cooking oil (Marico, Adani)
- Biscuits (Britannia, Parle)
- Hair oil (Marico, Bajaj Corp)
- Infant milk powder (Nestle)
- Cigarettes (ITC)
- Adhesives (Pidilite)
- Waterproofing (Pidilite)
- Trucks (Tata Motors, Ashok Leyland)
- Small cars (Maruti, Hyundai)
Now this trend looks likely to spread to more fragmented sectors where hitherto the unorganised players had greater profit share.
The Nifty
20 of today’s Nifty constituents are highly likely to be booted out over the next decade. If you are good at spotting the 20 entrants into the Nifty you are likely to deliver 40% CAGR over the next decade.
The Nifty typically churns by 40% over a 10-year period implying that 20 of the current Nifty constituents will find themselves ejected from India’s most actively traded benchmark index whilst an equal number will find themselves entering the index.
If you or I can second guess some of these exits/entrants we will improve our chances of generating returns significantly higher than the long term returns of investing in the Nifty (the total returns from the Nifty were 10% per annum in the decade running up to December 1, 2019).
For example, if we had taken the Nifty as it is stood a decade ago and invested only in those 30 companies which have stayed in the Nifty through the intervening 10-year period, our returns would have been 19% per annum.
There are 3 structural trends that are significant:
- The continuing formalisation of the economy and the concentration of profit share in almost every sector in the hands of one or two companies.
- The formalisation of savings, away from physical savings, and toward financial savings.
- The continuing formalisation of retail and, more generally, of distribution channels in India.
Going by the above structural trends combined with Marcellus’ proprietary forensic accounting and capital allocation models, the following companies appear to be potential Nifty entrants over the next decade:
- Pidilite
- Berger Paints
- Divi’s Lab
- Marico
- Info Edge
- Abbott India
- Page Industries
- ICICI Lombard
- Dabur
- HDFC Life
None of the above are recommendations, either by Morningstar or Marcellus Investment Managers.
