Why are DIIs and FIIs buying in India? Saurabh Mukherjea on what changed in market in one month
Saurabh Mukherjea, Founder, Marcellus Investment Managers, says that “in the last six weeks, in this financial year, our portfolio is up 8-9% although earnings compounding stays the same old 20%-25% that it has been this year, last year and the year before that. But the return of the FIIs is largely driven by the realisation that the weakness of the rupee or the strength of the dollar is now something that is largely behind us. We are roughly seeing a billion dollars a week of FII money coming into our market.”
Mukherjea also says that the competitive advantages of Asian Paints in paints, Pidilite in adhesives, Bajaj Finance in NBFC lending are such that it is very difficult for rivals to come and have a meaningful impact on these franchises.
A month ago, there was almost a drought in the market. FIIs were selling. Nobody wanted to buy India. Everybody wanted to go to China. Now it looks like there is a feast. DIIs are buying, FIIs are buying, Saurabh Mukherjea is buying, everybody is buying, nobody wants to sell. What has changed in the last month?
I think the blow up of the western banks and specifically the blow up of American banks has clearly had an impact. If you see the amount of bond buying that the Fed does somewhere around the middle of March, when these, the First Republic and SVB, etc. started blowing up, the Federal Reserve started buying bonds and that continues. Once a global investor or foreign investor sees that the Fed is now buying bonds and pumping dollars into the market, it becomes relatively easy for them to take a call that the rupee is not going to give up more ground. Thus you have the return of the FII to the Indian market.
Whether we like it or not, whether even our clients like it or not, what people like us buy in Marcellus, the sorts of stocks you guys are flashing up on the screen are the stocks that FIIs like. So in the last six weeks, basically in this financial year, our portfolio is up 8-9% although earnings compounding stays the same old 20%-25% that it has been this year, last year, the year before that. But the return of the FIIs is largely driven by their realisation that the weakness of the rupee or the strength of the dollar is now something that is largely behind us. Thus we are seeing roughly a billion dollars a week of FII money coming into our market.
I was reading a Morgan Stanley report in the morning and the Birlas are convinced that they want to challenge the paint market. The Jindals are convinced that they have an opportunity in the paint market. Pidilite is convinced that there is an opportunity in the paints market. But you are not convinced and you still feel that nobody can challenge Asian Paints. I understand it has been the sumo of the paint market right. But guess who are going to be challenging it now?
Everybody who plays cricket and IPL, wants to be Virat Kohli. I did the math once. There are roughly 500 players in the IPL, roughly 100, 150 or 400.
Let us get the favourites right. It is Dhoni for me.
So, what I was going to say.
« Back to recommendation stories
No, no, Dhoni, we have to agree. I watch for Dhoni, not for Virat Kohli.
Three cricketers; Dhoni, Rohit and Virat take home.
Okay, now you are making a good comeback.
Right, so Dhoni, Rohit and Virat take home 80% of the prize money and advertising dollars that Indian cricketers get. I think corporate life is very similar. There are plenty of companies which want to be Asian Paints. Why should not they aspire to be 35% rookie, 20-25% compounding machine? So, aspirations are going to be there forever. But in every industry, paints included, we are seeing two players take away 80% of the profits and the rivals, the aspirants will keep coming. It is incumbent on the sorts of companies you are flashing up on the screen. It is incumbent on them to build their muscle, their fitness, their competitive advantages and see off the rivals. So using that cricket analogy, I was trying to make the point that the Birlas have valid aspirations. Why shouldn’t they? JSW, Pidilite yesterday announced that they want to do it. But the competitive advantages of Asian Paints in paints, Pidilite in adhesives, Bajaj Finance in NBFC lending are such that it is very difficult for rivals to come and have a meaningful impact on these franchises.
I do not know whether this is a recent one or not, but I believe that you have made a large addition and that is Tata Elxsi to your portfolios. Why is that?
So back in December-January, when we exited Relaxo in our midcap portfolio Rising Giants, we bought a Tata Elxsi. So this theme of dominance, we discussed some dominant franchises in the design of automobiles, in the design of say OTT platforms as front end, in the design of many of the features we see in mobile phones, Tata Elxsi is increasingly emerging as a global leader. As auto design moves away from the old mode, which was once in 10 years, a Toyota gets a refresh or a Honda gets a refresh as we move away from that into a car design refresh cycle, which is more like what Apple does with its phones, the addressable market for Tata Elxsi expanded significantly.
It is a dominant player and is the largest in India in engineering, engineering and industrial design services. At a specific depth in designing in the auto sector, in the OTT sector, in the mobile sector, led us to make this a portfolio addition back in January. The stock has not done much, I think for the last couple of years. But if you look at the 20-year track record, the 10-year track record, both in terms of growth, free cash flow generation, it is impeccable. Now a quick disclaimer, all of these stocks that I am mentioning, I own them, my parents know them through Marcellus and our 10,000 clients have positions in these stocks.
You would not address that bullish rationale on to the other IT services, mainstay companies, would you?
Just to be clear, firms like LTTS and Tata Elxsi which are in our portfolio, are more in engineering and industrial design services. This is slightly different from IT services. In IT services, TCS remains our mainstay. In some of our advisory portfolios, we have Infosys. As I have said over the last couple of years, I remain astonished that investors in our country buy and sell firms like TCS and Infosys on the IT cycle because to my mind, it is a one-way story. The demand for Indian IT services is unrelenting.
The Fortune 500 companies do not really have any other credible place to go to cater to their demands. The migration to cloud is only one third done. So there is a huge growth runway. And TCS, to my mind, is the strongest moat in India on the supply side. The main trick in IT services is you need to be able to recruit one to two lakh people, train them, hold on to them and monetise them in front of clients. I do not think TCS does it. I do not think anybody does it better than TCS. I thought the recent results were sparkling. A lot of people were disappointed but I loved the recent results.
You bring in $10 billion of business in the midst of a Western banking crisis and war in Russia, Ukraine. You give me 25% operating margins and you give me roughly 16% PAT growth. Those are the sort of results we at Marcellus like. So TCS remains a big holding in our flagship product.
There’s much volatility within IT. The cloud story and the cloud opportunity is very large, and it could be a multiyear or a decadal opportunity where cloud lakes are getting created, transformation has just about started. Why is it that two quarters ago, IT companies were guiding for something different, and two quarters later they are guiding for something different? Why is there so much cyclicality in a business where there is a linear proposition of growth?
Absolutely. So nice point, I think it is very similar to what we see in Indian tech. A year ago, had you spoken to Indian tech companies, Indian unicorns, they were flush with cash. They were spending loads of money on hiring people. If you look at Indian unicorns today, money is tight. They are actually getting rid of people rather than hiring people. So that dynamic also has a bearing on the US tech ecosystem.
A firm like TCS has some exposure to that. The biggest exposure that TCS will have is US financial services and US banks. As we know, given the state of the US banking system at the moment, it would be a remarkable American banking CEO who signs a major new contract with TCS. So the near-term guidance that TCS has given is rightfully cautious. But if you and I sit here and say, one-year earnings, even two-year earnings really do not have that much influence on the valuation of a company, it is the next 10 years I am interested in.
It is difficult to see why in the next 10 years; a) the West will not move to the cloud. And b) if it does move to the cloud, it is difficult to see why they would not hire TCS to do that work for them. It is their ability to ignore short-term noise and take the long-term view which creates strong compounding. But that is our job and that is why I thought the Q4 results were both an honest assessment by a credible management team of near-term challenges. But at the same time, the Q4 results were also a clear indication of the sheer muscle that this company possesses and provides to its shareholders.
Images are for reference only.Images and contents gathered automatic from google or 3rd party sources.All rights on the images and contents are with their legal original owners.