Saurabh Mukherjea on why he added Divi’s to Rising Giant portfolio and gems of Little Champs portfolio

Saurabh Mukherjea, Founder, Marcellus Investment Managers, says “Divi’s Labs halved last year and so through November-December last year, we increased the position in Divi’s Lab very substantially in the flagship portfolio CCP but we also added Divi’s Lab to Rising Giants which focuses on companies with $3-4-5 billion market cap. Divi’s fell so much through last year that it became a midcap and we added it to Rising Giants. ”

Are there any new entrants to the Rising Giant portfolio? That is where I see the most interesting and upcoming names.
We have not added much; we are just concentrating on bulking up further. Divi’s Lab used to be only in CCP or Consistent Compounders, our largecap portfolio. I think everybody in the country knows Divi’s Labs halved last year so through November-December last year, we increased the position in Divi’s Lab very substantially in the flagship portfolio CCP but we also added Divi’s Lab to Rising Giants,

Rising Giants focuses on companies with $3-4-5 billion market cap and thankfully for our Rising Giants, Divi’s fell so much through last year that it became a midcap and we added Divi’s to Rising Giants. Barring that, the only other addition has been in our smallcap in our Kings Of Capital portfolio which is a financials’ portfolio where we added Prudent Corporate which is a company which provides a platform to mutual fund distributors and people who sell insurance policies to the masses. There are around 25,000 mutual fund distributors and insurance sales people on their platform and we think Prudent Corporate is a straightforward play on the financialisation of savings for also the more modest strata of Indian society where people are trying to save Rs 2-3-4 lakh a year through either mutual funds or through life insurance.

Let us also discuss some of the interesting mid and smallcap names that you have got in the Little Champs portfolio – Mold Tek Pack, Poshak, Tarson, GMM Pfaudler. What is the outlook and if you could just revisit some of these stocks?
Let us just go quickly then so Mold Tek Packaging leader in in-mold packaging is the sort of packaging you see in high-end FMCG products. They have Kwality Walls ice cream bucket. Asian Paints, Berger Paints use in-mold packaging in their more premium paint offerings and naturally therefore as the paint industry grows and as the premium end of FMCG grows, Mold Tek Packaging is setting up plants alongside the big paints and big FMCG giants. They have a niche in this and they are the leader in this. There is a specific technology advantage that they possess in in-mold packaging. We have interacted extensively with the management since we first bought the stake four years ago. We have seen the management raise its game on capital allocation, improve the technology and we remain very convinced that there is a long-term future for this very interesting smallcap company.

Paushak is a dominant player in Phosgene. Phosgene is an essential industrial chemical as essential as chlorine because this was the chemical at the heart of the Bhopal gas tragedy 40 years ago, it is a controlled substance. The government does not give out new licenses to make Phosgene. Paushak therefore is a quasi-monopoly. It tripled capacity through 2020, 2021 and we bought it once we had visibility that the ROCs, the return on capital, had been compressed by the tripling of capacity. We remain optimistic that as we come out of Covid, as the economy recovers, the incremental demand for Phosgene will be met by Paushak. Barring Paushak, the only other large manufacturer of Phosgene is a PSU, where I do not think the competition is going to be credible or sustainable in terms of a Paushak versus PSU situation.

In the case of GMM Pfaudler, the order books and domestic glass line reactors remain full from everything that we are hearing. We have got several of GMM's clients in our portfolio. We keep talking to GMM's clients. From everything that we are hearing from Baroda, from Vapi, from Hyderabad, there is domestic demand for glass-lined reactors. These are ceramic reactors within which pharmaceutical products are made. Domestic demand is strong. GMM glass-lined reactors have 55% market share globally. That part of the business remains strong, profit compounding driven by the glass-lined reactor piece, will remain very healthy.

The piece that we are doing more work on is the non-glass-lined piece. As GMM has now basically become a multinationalHalf of their profits now come from non-glass-lined reactors. We think revenue momentum is good there but we are trying to figure out how much dominance, what is the strength of the competitive mode here. But the profit outlook here remains very buoyant, as it has been for the last three years. The world is shifting away from China towards making pharma and specialty chemicals in countries like India. GMM remains a play on that.