No reason for pessimism in Indian IT services; plan to invest more in pharma: Saurabh Mukherjea

“I do not really see why there should be any pessimism about Indian IT services. We are steadfast in maintaining our TCS and LTTS holdings,” says Saurabh Mukherjea, Founder, Marcellus Investment Managers

Where are you now?
I am in Hyderabad, the city where Divi’s Lab is based. We have come and met the pharma ecosystem, given that we have large positions in several of the pharma and pet chem companies. It is a research visit to get plugged in further into the ecosystem.

What is happening in the pharma ecosystem? The pharma sector got rerated post Covid and now is getting derated. What is the reality here - the euphoric view of 2020 or the pessimism of 2022?
I do not know about pessimism. Honestly, we have not seen that much pessimism. The whole world is trying to replace China in both its formulation – API, and its intermediate supply chain. So not just the Government of India, but the Government of the United States, several European governments are keen that their countries reduce their dependence on China for the entire pharma supply chain that in turn has meant tonnes of work for Indian promoters.

So whether you are going to Baroda or Hyderabad, it is very difficult to meet these promoters now. They are busy running around the world signing up for more orders and that in turn means that the demand ecosystem is going all the way down – to say a glass lined reactor supplier like GMM Pfaudler – is revving up.

They are trying to figure out where exactly in this buoyant demand ecosystem one should invest more money. As we have said in the years gone by, we already have significant investments in firms like GMM, Alkyl, Divi’s. We are considering making some more investments in the space but as we invest in companies with barriers to entry with moats and that require careful work at the down level.

Last time we were chatting you were talking about the reduction in La Opala holding. Abbott India in your compounder PMS has been replaced by ICICI Lombard; in Kings of Capital, AU Small Finance which has been replaced by Home First Finance. Any other hidden gems that you are either working on or have already added?
We have actually added a Hyderabadi company in Little Champs over the last 10 days or so. It is a little bit more position building we need to do there. Once that is done, I will be happy to talk about it more. We will also reveal it in our newsletters. Just a disclaimer, all the stocks that I am talking about, we hold in most of our portfolios.

I hold these portfolios personally and my parents as well are invested in Marcellus’ portfolios but ICICI Bank has also been added to Kings of Capital. That was an addition we have made over the last couple of months. There were certain things we wanted to clarify with ICICI Bank about how they are running the business and are now satisfied that the ICICI Bank of say five, six, seven years ago has turned the corner and therefore built a position in Kings of Capital.

A small cap addition has been made in Little Champs but we need to do a little bit more positioning building before we start talking about that position.

ICICI Bank has done rather well in the last two years ever since Sandeep Bakshi took over but you have waited for two years for your parameters to get clarified. What were those observations which convinced you that according to Marcellus things are going to change for better?
In the pre Sandeep Bakshi era, people who were in key positions of power had made capital allocation decisions which seemed to us unwise. We wanted to understand whether those people control the capital allocation levers in ICICI Bank any more. It took us a couple of years to figure out that in the Sandeep Bakshi era, those people are firmly out of power and until we got that clarity that the people who basically made wrong capital allocation decisions are no longer controlling the levers of power in ICICI Bank, we had not gone ahead with the investment.

But all credit to Mr Bakshi as he has rebuilt the bank and rebuilt the key team which runs the bank and we wish them well and we hope to compound with them in the years to come.

Is it time to now endorse the pessimism in IT? At the beginning of the year, everyone thought that nothing could go right for banks and nothing could go wrong for IT. Now the view is pretty much the other way round?
I am not sure too. I see no reasons for pessimism in IT, whether it is our holdings which are TCS and LTTS, which is more an engineering R&D or whether it is our holdings in a firm like Infosys. The picture is clear, there is no weakness in the pipeline.

Even beyond India, if you look at Accenture’s results or talk to people at Accenture, there is no weakness in the IT services demand pipeline and I doubt there will be, if the west is going into recession. Officially, the United States is now in recession with two quarters of shrinking output. If the West is in recession, then that will increase demand for Indian IT services and even more work will come to Bangalore, Pune and Hyderabad.

Hence I do not really see why there should be any pessimism about Indian IT services. We are steadfast in maintaining our TCS and LTTS holdings.