Saurabh Mukherjea on where to look for hidden gems for portfolio

“It is a time when the demand environment is strong because there are inflationary pressures. If we can identify companies with pricing power, we will come out of this smiling,” says Saurabh Mukherjea, Founder & CIO, Marcellus Investment Managers.

As inflation had started coming back, it was considered healthy, the reopening trade and normalisation of the economy had started. There was wage inflation which everybody was enjoying. But the bent of the economy right now is very different. Inflation is a real scare. Margins are coming under pressure. Demand stress is visible. How does investing change? Would the stocks one bought last year be different from will work this year?
I would say that the macro situation this year is better than it was last year. Last year, the demand piece got wrecked comprehensively because of the sheer brutality of the second wave. This year, after the first two weeks of January when Omicron played a role, from the middle of January onwards, there seems to have been a pretty resilient demand recovery across sectors – whether it is credit offtake, whether it is demand for discretionary consumption or products like jewellery or demand for building material products.

All our channel checks suggest a fairly resilient demand environment which is strengthening by the week as the unlock kicks in. Kids are going back to school. As we were just discussing, we are going back to hotels and back to shopping malls and multiplexes. It also means unfortunately more traffic on the streets but after two years of lockdown, even seeing traffic on the streets makes one happy. But the main point I am making is that the macro outlook is as clear as it can be. Economic recovery with demand outstripping supply, as a result inflationary pressures, as a result interest rate hikes. But this is a very familiar situation for India. These sorts of situations in India inevitably have been accompanied by bull runs.

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Specialty chemical space has been a favourite. There has been GMM Pfaudler as well as Alkyl Amines. Anything else within this space that is catching your eye?
We continue buying more of GMM, Alkyl stocks. We have also built a position in a company called Paushak which is the market leader in phosgene. Phosgene is an essential industrial chemical. It is as essential as chlorine. Because it is a controlled substance, the government does not give out licences to build phosgene factories very often but the demand for the product is vast. Supply is scarce. Paushak is the market leader and hence in our smallcap fund we have built a position in Paushak.

You have one hidden gem Paushak. What are some of the other hidden gem stories that you are working with?
The whole space around supplying basic industrial chemicals to the pharma companies, to the processed chemicals industry and similarly supplying inputs for the FMCG industry. I call these pharma ancillaries and FMCG ancillaries. That industry is consolidating.

In each of these pharma and FMCG ancillaries one or two monopolies are emerging and we have been trying very hard to identify them, making sure that they are clean, well run monopolies and loading up on them. For example, another FMCG ancillary would be Fine Organics. It is a company which provides emulsifiers to pretty much all the breads and biscuits you and I will be having in India.

Similarly, there is Galaxy Surfactants and the products are used in lotions and creams and shampoos. We are looking at a couple more, we are building positions in one more FMCG ancillary and what we find very interesting is that FMCG ancillaries also have the pricing power to take raw material cost inflation and pass it on to the giant FMCG – be it Unilever or P&G or Britannia. That is in a way the theme of our investing.

It is a time when the demand environment is strong because there are inflationary pressures. If we can identify companies with pricing power, we will come out of this smiling.