Asian Paints, Pidilite Are ‘Virat Kohlis’ Of Corporate India, Says Saurabh Mukherjea
Investors should put their money in companies that make essential goods and reinvest the excess cash that they generate back into their business. Having found companies with this combination, they will have built themselves a portfolio that will make money even through disasters, pandemics and economic crises, said Saurabh Mukherjea.
And his investment firm, Marcellus Investment Managers, has found that combination in Asian Paints Ltd. and Pidilite Industries Ltd., he told BloombergQuint in an interview.
However, there are only around 20 companies of the same caliber in the BSE 500 basket, he said. So what is the formula for discovering these companies?
The first basic step is to vet a potential investment for three factors:
- Companies with clean accounts and that publish believable, bona fide numbers. Within the BSE 500 companies the list is as short as 70-80 companies.
- Companies that sell essential products
- Companies with very high barriers to entry so that they don't have to compete to survive on a daily basis.
After this basic check, investors need to look for businesses whose return on capital is much higher than the cost of capital. “The basic measure of corporate success is, is my business generating free cash flow? ROE has to be above COE. That is what we are paying for when we buy the stock,” Mukherjea said.
He said that 70 percent of Nifty 50 companies haven't generated free cash flow in the last 10 years.
But that's not enough. The second condition is whether the business is reinvesting a large chunk of this surplus capital back into itself, he said. While companies like Castrol India Ltd. and Colgate-Palmolive India Ltd. have extremely high return on capital, they haven't figured out how to reinvest that money into growing that business, he said.
In comparison, Pidilite started off in 1970s-80s to become an adhesive monopoly and has reinvested the capital from that to also become a monopoly in India's waterproofing business. Citing its example, Mukherjea said while these companies are very difficult to find, they are the ones that can give compounding returns as they double their profits every few years.
Watch the full conversation here:
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