Saurabh Mukherjea on why he exited La Opala & why he likes Home First Finance

“At the Rs 10 lakh end of the home loan market, we do not see high street banks being as visible and as relevant and at that 10 lakh, we are very keen to participate because I think a lot of the formal job creation is not big ticket, incredibly well paid jobs. These are modest paying jobs, Rs 2-3-4-5 lakh per annum salary jobs and that is where Awas and Home First are very good,” says Saurabh Mukherjea, Founder, Marcellus Investment Managers.


A few months ago you said the insanity is not how the new age tech companies have halved but how they ran up post their listing. Now we are seeing a lot of them being quite cognisant about their overall profitability metrics, short of taking notice of the factors that had alarmed shareholders in the past. Having read into some of the companies’ numbers, the kind of commentary that they are giving, does the view change now or do you believe that the move is not justifiable?
There are two ways to see the whole situation; one is to say that until they get the next round of funding, it will be tough for these new age tech companies whether they are listed or unlisted. The other way to see it the way we would like to see at Marcellus is unless you generate cash, unless you make money, unless you put cash flow on the table, it is very difficult for conservative defensive investors like us to invest in you. Show us the money, show us the cash flow, it does not matter which sector you are in whether you are five years old or 15 years old. Show us that you can generate cash. If you cannot generate cash, I am afraid it is difficult for sensible investors to buy stakes in these companies.

I want to talk about the recent changes that you have made to your Little Champs Portfolio and we have not spoken after that. You have exited La Opala. Why? Is this not the longest term consumption play which is currently underway?
La Opala, over the last decade, built the category of ovenware crockery category that did not exist before. Ajit Jhunjhunwala and team deserve enormous credit for building a brand new category. The reason we exited was we are seeing a couple of companies over the last three years now. Over an extended period of time, we are seeing a couple of other companies ramp up the competitive intensity pretty aggressively. It is a small category, unlike pathlabs or paints which are multi-multibillion dollar categories.

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Ovenware is still a small category and in that category, we are seeing two other companies with plenty of cash generative businesses. The two other companies who are ramping up the competitive intensity are cash generative businesses and we have been doing channel checks pretty consistently over the last couple of years. We have been left a little concerned about whether La Opala can respond to the ramp up in competitive intensity. There is no reason that they cannot, it is a well run company and Ajit Jhunjhunwala does a wonderful job but we did not quite see the competitive response and hence the exit.

Again much like the ITC, if we see La Opala stepping up to the plate and dealing with the ramp up in competitive intensity, we will obviously revisit that exit.

Then why Home First Finance? I understand that realty is on the anvil of multiyear bull run and along with realty, the ancillaries as well are going to do well but given that Home First Finance caters mostly to the salaried segment, with inflation, high interest rates and what have you, all are going to have a bearing. So, why this one out of the entire basket?
We already have Awas, we added Home First in several of our portfolios. Why we added Home First Logic is threefold; firstly, we are continuing to see spectacular numbers in terms of formal sector job additions. If you take the EPFO numbers, for the last three years, something like 30-35 million jobs were created in the formal sector. I have never seen that sort of remarkable job creation in the formal sector and I have not seen it in any country, let alone in India.

Just to put it in perspective, 30 million jobs is the entire French labour force; that is the entire British labour force. That is what we have added and even the recent EPFO prints on formal sector job creation stay very strong.

The natural flowthrough of that will be mortgages, home loans etc. It is a visceral human desire to have a roof over your head. There is a big story around formal job creation. This is the formalisation of the country and it is showing up in job numbers.

The second leg is the HDFC Banks and Kotak Banks in our portfolio focus on sort of lending to the people who are watching this people like you and me, at the Rs 10 lakh end of the home loan market, we do not see the high street banks being as visible and as relevant and at that 10 lakh, we are very keen to participate because I think a lot of the formal job creation is not big ticket, incredibly well paid jobs. These are modest paying jobs, Rs 2-3-4-5 lakh per annum salary jobs and that is where Awas and Home First are very good.

Awas does it more for the non salaried class. We see Awas provides a Rs 10 lakh house to the gol gappa seller. Home First does it more for the salaried class. A sweeper working for a state government earning say Rs 3 lakh a year will get a loan from Home First. We see this space as very vibrant with lots of growth prospects and both Awas and Home First have clean accounts, good corporate governance, have shown strong ability to deal with the loan losses through Covid, well capitalised balance sheets and hence the Marcellus load up on both of these names.

Apart from the heavyweight FMCG names the likes of Nestle, Asian Paints you had also spoken about pharma ancillaries and FMCG ancillaries seeing a little bit of consolidation. You had flagged off Sharda Crop, Galaxy, Fine Organics. Any more additions? Are you looking at this place closely?
We are shareholders in Galaxy and in Fine Organics, we do not hold Sharda Crop Chem. We have never held Sharda. In terms of what is happening in this space, in terms of pharma ancillaries and FMCG ancillaries, we continue to be very constructive, we are seeing good results coming through.

For example, Fine Organics published results last week. Both top line and bottom line are growing at a very healthy rate. As I might have said before, its grip on the food additive space, on emulsifiers is very strong. It is one of the most dominant players in food additives in India.

Similarly, we have been shareholders for three years now of a smaller FMCG player like Amruntajan. It is nothing spectacular but has given solid results. Galaxy too, is dealing with the input cost pressures. I am very impressed by how Galaxy is protecting its gross margins in these difficult times. So we will stay invested in both pharma and FMCG ancillaries. That is a straightforward way to play the formalisation of the entire B2B ecosystem in our country.