Identification of opportunities in the Indian Market

This blog covers the insights shared by Key resource persons from Marcellus Investment Managers - Mr. Saurabh Mukherjea - Founder & CIO, Mr. Pramod Gubbi - Head of Sales, and Mr. Rakshit Ranjan - Portfolio Manager, at our exclusive webinar session

Marking the successful completion of 3 years by Marcellus, the speakers shared the key pointers that seeded the inception of Marcellus, the process followed by Marcellus in the construction of a portfolio, and their success journey.

Inception of Marcellus:

Marcellus, according to its Founder & CIO - Mr. Saurabh Mukherjea, was born out of 3 key insights that challenged the conventional narrative about India. These three insights illuminated the plethora of opportunities in the Indian Market as opposed to the conventional belief otherwise.

The movement towards financialization of assets.
The fall of the informal sector & rise of big business houses.
Infrastructure improvement in India.

(1) The movement towards financialization of assets:

Mr. Saurab Mukherjea, on his visit to a small industrial town named Boisar, observed that people in the sub-urban and rural parts of India are saving through the stock market, both directly (through their Demat account) and indirectly (through Mutual funds). Instead of going for conventional saving methods like investment in physical assets (Gold, Real estate), the people in the suburbs and rural parts are now moving towards the financialization of assets. This opens a huge opportunity for players like Marcellus as the Indian Market has a huge chunk of assets locked as physical assets and the movement towards financialization of assets is picking up the pace.

(2) The fall of Informal sectors:

Based on the interaction with FMCG distributors in Boisar, Mr. Saurabh Mukherjea understood that the big players in the market like Amazon, Dmart, Flipkart, etc are gradually expanding their business and making it difficult for small-time players to survive. This indicates the fall of the Informal sector because soon the market will be captured and consolidated by big business houses. This also indicates the need for players like Marcellus to

(3) Infrastructure improvement in India:

In India, the highway networks doubled, broadband users increased by X 50, the number of bank accounts increased by X3, and air travel increased by X5. With the infrastructural development and penetration of technologies, the opportunities have bloomed up much faster and wider than before. The gap between, cities, suburbs, and rural markets is shrinking and the businesses are getting consolidated under big brands, making India – a market of billions of opportunities.

The Marcellus way:

Mr. Rakshit, Portfolio Manager - Marcellus, explained the filtering methods and the bottom-up research employed by Marcellus to construct a Portfolio.

The first layer of the filter:

Marcellus’s first layer of the filter is the risk mitigation filter where they evaluate companies based on their accounting quality, performance history, and the ability to not compromise on costing standards. For this, they are using a Proprietary Fraud Detection framework that identifies all the accounting irregularities and red flags.

After this first layer of the filer, Mr. Rakshit claims, around 400-410 of the 500 companies listed in the BSE 500 universe will be eliminated, leaving just 90-100 companies to proceed further.

The second layer of the filter:

In the second layer of the filer, Marcellus takes into account the Capital Allocation Track Record to assess a company’s ability to make money in the long run. With the Historical Capital Allocation Track Record, Marcellus tries to identify the consistency of returns on capital employed above or minimum threshold of cost of capital and the consistency of the revenue growth. Marcellus considers data spanning over 10-15 years to assess the consistency of performance. With the historic data, they understand a Company’s DNA and its ability to sustain the pricing power over the long run.

After this filter, Mr. Rakshit said, the Marcellus analyst team will have around 25 companies to proceed further.

The Bottom-up Research process:

After filtering companies using the two filters, Marcellus employs a bottom-up approach where they assess a business’s competence in two broad aspects –

1) current competitive advantage – ability to stand against the competition without compromising on the rate of cash generation

2) Longevity /sustainability of competitive advantage – Degree to which the greatness can be sustained.

To assess Current competitive advantage, they consider Earnings growth rate & Moat score and for Longevity of competitive advantage, they use the Lethargy Score & Succession planning score. With this bottom-up research, they get – (1) position sizing of stocks relative to others in the portfolio, (2) Absolute valuation of stocks.

Marcellus’s performance:

Mr. Rakshit said that the Free Cashflow is the only driver of value in the longer run. On that note, he showed the free cash flow of their portfolios which produced significant growth and continuous cash flow. According to his presentation, despite incidents like demonetization, GST, the financial crisis, and the COVID outbreak, the portfolios managed by Marcellus did not go through any moderation in the cash flow. He also mentioned that companies received the following benefits with them - accelerated tech investments, capital allocation initiatives, market gains, and RM inflation.

Marcellus’s Journey:

Mr. Pramod Gubbi - Head of Sales, explained the journey of Marcellus to success. The company was brought in the right place and right time and had seen a big shift in the financial sector overall in the past decade. As they came across several towns in India, they witnessed people who had never made an investment in their whole journey which turned out to be a greater vision point. And the greater point was the networking and the infrastructure that has been developed over the decades. As an end note, he mentioned that India is a country with billion opportunities!

In the webinar, the speakers explained how Marcellus was able to perform well and complete 3 years successfully with 27% CAGR in this short span in detail. They also answered some questions towards the end as a part of the Q and A session.

Relive the entire session and hear the insights directly from experts with the recordings of the session appended below: