From rulers to challengers: Marcellus CEO backs mid-sized firms

Having lived through events like the 2G scam, coal-gate scam, IL&FS and the 2020 covid crash, perhaps we had gotten too defensive: Saurabh Mukherjea, founder and chief executive of Marcellus Investment Advisors,
Having lived through events like the 2G scam, coal-gate scam, IL&FS and the 2020 covid crash, perhaps we had gotten too defensive: Saurabh Mukherjea, founder and chief executive of Marcellus Investment Advisors,

Summary

  • The moat will come from ‘better brains’ rather than sheer size. Big money doesn’t necessarily beget money, says Mukherjea.

In a major move, Saurabh Mukherjea, founder and chief executive of Marcellus Investment Advisors, is shifting his investment strategy towards smaller 'challenger' companies. This marks a significant departure from his traditional focus on high return on capital employed (ROCE) firms, even at higher valuations, considering them as ‘consistent compounders’ and a relatively strong bet.

“Having lived through events like the 2G scam, coal-gate scam, IL&FS and the 2020 covid crash, perhaps we had gotten too defensive. We focused too much on companies that had a high ROCE even if they weren’t growing very fast. Since covid, however, a set of smaller ‘challenger’ companies have outperformed," Mukherjea told reporters at a media interaction today.

“The moat will come from ‘better brains’ rather than sheer size. Big money doesn’t necessarily beget money," he added.

In his new book, Mukherjea will be focusing on these disruptive mid-sized companies, categorizing as 'challengers'. These firms, numbering around 5,000 and smaller than the top 800 by profit size, have shown 16% compound annual growth rate (CAGR) in profits between 2012 and 2022, outperforming the top 800 at 15% CAGR, according to Mukherjea's presentation.

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(Graphics: Mint)

Some of these challengers have been incubated by larger companies through separate subsidiaries, aiming to gain market share from smaller, unorganized competitors (with profits less than 50 crore) and potentially challenging India's largest corporations, or 'rulers', said Mukherjea.

“Over the last 12 months, CCP underwent a significant increase in allocation to companies (from 10% previously to over 50% currently) which have seeded new business optionalities through capital allocation decisions over the last 3-5 years," according to Mukherjea’s May 2024 portfolio update.

"These new business optionalities are expected to add incremental revenue growth drivers over the next 2-3 years, thereby helping accelerate the overall company’s earnings growth to well above 20% CAGR (in some cases, even higher than 25% CAGR)," it added.

Mukherjea counts companies such as Trent and Tube Investments among challenger companies. “After the addition of Trent, Astral and Narayana Health in FY24, during FY25 till date (since 1 April 2024) we have added three new stocks to the portfolio—Tube Investments, Cholamandalam Investment and Finance, and Eicher Motors," according to the May 2024 update to Mukherjea’s Consistent Compounders Portfolio.

The unravelling of China’s economic dominance will also contribute to the growth of India’s challenger companies, he added.

However, despite these strategic shifts, Mukherjea's Portfolio Management Service (PMS) has faced challenges recently, seeing outflows due to underperformance.

As of May 31, 2024, his flagship Consistent Compounders Strategy has delivered only a 12% return over the past year, compared to 23% for the Nifty 50. His other strategies, Rising Giants, Little Champs, and Kings of Capital Portfolio, have shown returns of 11.5%, 4%, and 10.6%, respectively, all trailing behind the Nifty 50 and Nifty 500, which have risen by 34.7%.

This underperformance has been consistent over the past three years. However, over the past five years, Mukherjea's Consistent Compounders Portfolio has slightly outperformed the Nifty with a 15.62% return compared to 14.95%.

Considering past performances, the success of Mukherjea's pivot towards challenger companies remains uncertain, leaving open the question of whether it will reverse his recent fortunes.

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