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Alpha Moguls | From ITC To IndiGo, The Stocks That Don’t Cut It For Saurabh Mukherjea

Barely 15 companies passed Mukherjea’s three-filter test in a ten-year period.

A sign is displayed on a washed sidewalk. (Photographer: Kevork Djansezian/Bloomberg)
A sign is displayed on a washed sidewalk. (Photographer: Kevork Djansezian/Bloomberg)

Few companies make it to Saurabh Mukherjea’s ownership list unless they meet three key criteria.

Clean accounts, the essentiality of the product/service offered and dominance in the market—let Mukherjea, founder and chief investment officer at Marcellus Investment Managers, run concentrated portfolios. “That actually allows us to underpin a common investment culture across the whole portfolio, across all our analysts and fund managers,” he told BloombergQuint in a recent episode of the special series Alpha Moguls.

Barely 15 companies have passed this test in a 10-year period and the fund’s flagship portfolio has “only has 13 stocks in it,” Mukherjea says.

Marcellus is invested in approximately 30 stocks—via a combination of its flagship portfolio, financial portfolio Kings of Capital and the small-cap one called Little Champs.

According to Mukherjea, Marcellus’ strength is a long-term research approach while assessing companies. “That’s the 10-15 years of forensics.” If a company does not meet the criteria laid out, Mukherjea said, "We would not be interested."

Here are some stocks that Saurabh Mukherjea avoids investing in:

ITC Ltd.

Mukherjea sold ITC as the company fell short in fulfilling one of Marcellus’ key metric.

“In ITC’s case, we could see, with a high degree of certainty, dividend yields plus earnings growth taking us to 15-16%, maybe even 17%,” he said. "But to be part of any of our portfolios, we want to see with a high degree of certainty, 20% earnings compounding," he explained.

However, Mukherjea emphasised how the multinational conglomerate remains powerful on other fronts. “That doesn’t take anything away from one of the greatest franchises existing today. It’s a double-barrelled franchise built around a cigarette monopoly and a thriving FMCG business.”

InterGlobe Aviation Ltd.

The airline sector hasn’t produced companies that can generate a return on capital above the cost of capital on a steady basis, according to Mukherjea.

There is no barrier to entry into this industry. So, as a result whenever IndiGo’s volumes go up, they typically cut their tariffs to maintain their competitive standing. Your high volume and your tariff cut cancels out and you end up with a zero EPS (earnings per share) growth business.
Saurabh Mukherjea, Founder, Marcellus Investment Managers

IT Stocks

Although information technology companies deliver a high return on capital employed, they lack consistency in growth. A consistent compounder portfolio doesn’t have IT stocks, he said.

“In our country, whether you’re doing IT services or Swiggy-Zomato type products, to deliver double-digit revenue growth year after year with metronomic regularity is not easy.”

Growth of IT companies is driven by global demand and that is not an easily predictable number, Mukherjea said. Another reason he cites for avoiding IT stocks is that the reinvestment of free cash flow is not intense.

Watch the full interview with Mukherjea here.