Three Simple — But Not Easy — Ways To Make Money In India’s Markets

“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” –Charlie Munger“Even if we think we know what’s in store in terms of things like inflation, recessions, and interest rates, there’s absolutely no way to know how market prices comport with those expectations. This is more significant than most people realize.” –Howard Marks’ memo to client, July 2022 .Are you one of those people who is:Completely on top of macro trends from the latest Federal Reserve announcement to the hottest data on fund flows?Keeping track of share prices and P/E multiples all the time?Up to date with the latest gossip in the corridors of power in Mumbai, Bengaluru, and Delhi?Despite doing all this hard work do you find that none of this has helped you make money in the post-Covid 19 rally? If so, fear not. Help is at hand. On Marcellus’ fourth anniversary, we are revealing three simple techniques which can help almost anyone make money in India..1. Benefit from the steady decline of Public Sector Undertakings (PSUs)In many sectors of the Indian economy, PSUs still account for the majority of the market share. In a country where managerial talent is super scarce, the PSUs unfortunately cannot afford to hire and retain good talent. That in turn means that the private sector competitors of these PSUs are winning the war for talent, and therefore for market share – year after year, decade after decade. That is why we in Marcellus call PSUs the gift that never stops giving.. As in banking, so in life insurance and general insurance – the steady ceding of market share by giant PSU insurers enriches Marcellus’ clients via our holdings in well run general insurers (ICICI Lombard) and life insurers (HDFC Life).2. Benefit from the erosion of the black economyAs we have explained in numerous notes and webinars, the launch of GST in 2017, followed by a steady increase in enforcement activities by the authorities, is forcing companies, which for decades evaded tax, to either shut shop (7.3 lakh companies shut shop in FY22—see more here) or scale back their activities as their profit margins are curtailed by tax payments. This in turn means that efficient, well managed, tax paying companies are gaining market share – at the expense of the black economy – year after year.. So, all you have to do is identify sectors which are seeing rapid “formalisation” (the technical term for the hammering of the black economy) and invest in the most efficiently managed company in the sector. As the black economy shrinks, Marcellus’ clients are getting rich courtesy our investments in Asian Paints and Berger Paints (the most efficient paint manufacturers), Astral Poly (the most efficient CPVC pipe manufacturer), Pidilite (the most efficient adhesives and waterproofing manufacturer) and Titan (the most efficient jeweller).3. Benefit from the demise of China’s manufacturing prowessDuring the 30-year period between 1985-2015 China was unstoppable. Chinese companies conquered sector after sector and laid to waste whole sectors of the Indian economy such as the manufacturing of Active Pharmaceutical Ingredients (APIs), Specialty Chemicals, synthetic textiles (and thus apparel), various types of plastics, footwear, electronics, etc. And then for reasons we don’t fully understand, around 2015 the Chinese juggernaut stopped and year-by-year the situation in China – economically and politically – has deteriorated.China’s troubles seem deep rooted. Firstly, they seem to have built too many apartments, offices, etc., and as a result the Chinese real estate developers seem to be in financial trouble courtesy the excess unsold inventory on their balance sheets. Secondly, the Chinese public appears to be revolting against paying monthly instalments for flats which are supposed to be built (but are not being built because the developer has run out of money.Thirdly, the combination of the previous two points means that the banking system is stricken with bad debt, with NPAs rocketing to such levels that analysts now express NPAs as a % of GDP! Fourthly, Xi Jinping continues to hammer the Chinese economy with lockdowns precipitated by his zero-Covid policy.As China slides, knowledge intensive light industrial and specialty chemical manufacturers in India are finding that the local (Indian) and global market has opened up for them. Quoting from our Little Champs newsletter dated 28th July 2022—The Evolutions Underpinning the Revolution:“Little Champs portfolio companies’ dominant position in their niche markets forms the key basis for their superior pricing power, profitability and RoCE vs. peers. However, a key pitfall of ‘niche focus’ is a high probability of hitting a growth ceiling after reaching a dominant position in a niche industry – a concern often raised for Little Champs and more generally for B2B companies. Little Champs are successfully mitigating these growth concerns through their globalisation strategy—nearly 50% of the non-Financial Little Champs companies now derive more than 25% of their revenues from outside India. More importantly, these global forays are based on product innovations, process improvements and people management – these are more enduring moats than competitive pricing. Besides providing a significant growth runway, globalisation gives the Little Champs learnings which further enhance their domestic market dominance. The globalisation strategy has been an important pillar of expanding the addressable market and adding new growth drivers to many of the Little Champs’ business. For more details on the globalisation strategy see the July 2021 Little Champs newsletter.”.But “Hang on” I hear you say, “Hasn’t Marcellus Underperformed?”As our clients know, we invest in quality companies i.e., companies with clean accounts, sensible capital allocation across long periods of time and dominant franchises (which can charge product prices 20-40% higher than the competition without any loss of market share). Over the past 12 months whilst our investee companies have produced healthy results – see the exhibit below – their share prices have corrected as investors, especially FPIs, have taken fright at the scary macro situation in the West, the never-ending lockdown in China alongside the war being waged by Russia. The opening exhibit of this note gives you data on our performance. So why does Marcellus stay invested in these high-quality businesses which seemingly have ‘underperformed’?.We don’t know where the broader economy will go next month or next year. We don’t know when Russia’s war in Ukraine will end or when the Federal Reserve will stop hiking rates. We don’t know where the Dollar-Rupee exchange rate will be next month or next year. What we do know is that: (a) the competitive advantages of our investee companies have not been impacted either by the Federal Reserve’s rate hikes or by Russia’s war in Ukraine or by Xi Jinping’s policies; and (b) simple calculations show that we will make more money from staying invested in these outstanding franchises (than from investing in other stocks which optically look cheap).The reason we are able to buy these great companies without paying share prices which fully reflect their superior competitive advantages is because the conventional three stage DCF employed by most investors tends to undervalue the longevity of a great business (see our January 2020 CCP newsletter which explains this in detail). Given the depth of research and conviction required to hold such a view (regarding an extended high growth period), most investors seek comfort within a narrow band of P/E multiples. We thank them for doing so because that gives us the opportunity to continue compounding our clients’ wealth at a brisk rate..Note: All the stocks mentioned in this article are a part of Marcellus’ portfolios. Many of Marcellus’ staff members and their families are also heavily invested in these stocks.Saurabh Mukherjea, Nandita Rajhansa, and Prashant Mittal work for Marcellus Investment Managers. Marcellus’ book, “Diamonds in the Dust: Consistent Compounding for Extraordinary Wealth Creation” has been published by Penguin. Disclaimer: Read here.The views expressed here are those of the authors, and do not necessarily represent the views of BQ Prime or its editorial team.

Three Simple — But Not Easy — Ways To Make Money In India’s Markets

Saurabh Mukherjea and the Marcellus team reveal three simple techniques which can help almost anyone make money in India.

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