Portfolio of leading franchises with stellar track record of capital allocation, clean accounts, corporate governance and high growth potential
Saurabh Mukherjea, the author of bestsellers like “Coffee Can Investing: The Low Risk Road to Stupendous Wealth” and founder of the Marcellus PMS Fund, is known to be a stickler for quality.
He doesn’t touch a stock unless it meets the following stringent qualities:
(i) It should be a leading franchise with a stellar track record of capital allocation,
(ii) The accounts should be clean with no financial jugglery,
(iii) The standards of corporate governance should be high and
(iv) The stock should have high growth potential.
No doubt, the pre-conditions are tough and it is like finding a needle in a haystack.
“We want to be sure of staying away from dubious names where we are not convinced about the cleanliness of accounts or the integrity of the promoters (even though business potential may sound promising) as the fruits of company’s performance may not get shared with minority shareholders,” Saurabh has stated.
The fruits of the efforts are visible in the fact that the Little Champs portfolio has delivered a gain of 15% since August 2019 while the BSE Smallcap Index has languished at 0.5%.
“On an allocation weighted basis, Little Champs portfolio delivered Revenue, EBITDA and PBT growth of 0%, 1% and 1% respectively in FY20 (the YoY PAT figures are not comparable due to the reduction in the income tax rates announced in September 2019). On the other hand, BSE Smallcap index witnessed a median PBT decline of between 10-15% in FY20,” Saurabh has stated, with justified pride in his tone.
Top 4 stocks in the ‘Little Champs’ portfolio
Saurabh has revealed that the ‘Little Champs’ portfolio has 15 powerhouse stocks in it.
He has discussed the investment rationale of four of these stocks and offered a brief synopsis of the rest.
(1) GMM Pfaudler, Blue-chip MNC with a “hammerlock” on a monopoly product
Saurabh had recommended GMM Pfaudler to us in March 2020, when the markets had tanked like a ton of bricks over the CoronaVirus pandemic (see Saurabh Mukherjea Adds Blue-Chip MNC Stock (Market Leader, Debt-Free, High RoE) To Portfolio Of Multibaggers).
That was precisely the perfect moment to buy the stock because it has surged like a supersonic rocket since then, delivering mammoth gains.
In just the last 12 months, the stock has given a gain of 200%.
Saurabh has made it clear that the stock has a long runway ahead of it.
“GMM Pfaudler’s capital allocation in recent years has been almost exemplary. Thanks to strong barriers to entry (around reputation and world class technology), the company is the preferred supplier of glass lined vessels to the premier Indian pharma & chemical companies. As a result, its pre-tax ROCEs tend to be around 30%, well above its cost of capital. That in turn implies that free cashflow generation has not been a problem for this firm.”
He has also pointed out that due to shrewd strategies of capital allocation, GMM Pfaudler now has a “complete hammerlock” on a monopoly product.
“The number 2 player in the market, Die Dietrich, a German company, exited India and GMM stepped into to buy its plant & order book for Rs 53 crores (implied P/Sales multiple on the deal on 1x). Post this acquisition, GMM has an almost complete hammerlock on an essential B2B product which is in short supply and where the barriers to entry (around regulation and technology) are very high“.
(2) Alkyl Amines Chemicals – leader in oligopolistic market
Alkyl Amines Chemicals is a dominant player in the lucrative market of specialty chemicals.
Anand Rathi has provided a vivid description about the Company’s potential:
“The company has a leadership position in the amines market for some of the products. The Indian amines industry is broadly oligopolistic and Alkyl Amines Chemicals is one of the leading players with over 100 products. The company has been the market leader in ethylamine segment and among the foremost manufactures of methylamine, diethyl hydroxylamine, and dimethylamine hydrochloride in the country. It has also commissioned a new methylamine plant at Dahej in March 2018“.
It is also pointed out that the market share of the company in methyl amines market has improved significantly in FY19, post the capacity addition at new plant and subsequent utilisation at the new plant at around 70% in the year.
A similar sentiment has been expressed by HDFC Securities in their latest research report.
“The good gets better – Our BUY recommendation on AACL with a TP of INR 2,500 is premised on (1) Robust demand from pharmaceutical and agrochemical industry that form 70% of revenue mix, (2) Rising market share in Methyl Amines, and (3) Impending capacity expansion for multiple products, including the high-margin Acetonitrile,” it is stated in a succinct manner.
(3) Garware Technical Fibres Ltd
Garware Technical Fibres is a fail-safe stock that we can add to our portfolios without much worry.
Saurabh has pointed out that the Company is well diversified and has immunity against surging crude oil prices.
“Starting out as supplier of cordage products to domestic fishing and shipping industry, Company successfully diversified into sports, aquaculture and industrial sectors across global markets backed by strong production innovations and customer connects. Value added products now account for >60% of total revenues lending immunity against volatility in crude based raw material prices,” he has stated.
(4) DCB Bank – The next HDFC Bank, Bajaj Finance?
Saurabh has already cautioned us not to fall prey to junkyard PSU Banks and other poor-quality lender stocks because the surging NPAs will cripple them.
Amongst large-cap stocks, he has recommended that we buy Bajaj Finance, HDFC Bank and Kotak Bank because these will thrive in the difficult environment.
Saurabh Mukherjea says don's get caught up in the near term forecasts, focus on long term. Bajaj Finance, HDFC Bank, Kotak Bank look incredibly 'juicy', attractive at this level
Premium financials in NBFC space, auto look very attractive
— avanne dubash (@avannedubash) May 11, 2020
Amongst the small-cap banking stocks, Saurabh has picked DCB Bank.
“We believe that Financial Services stocks in our portfolio (one bank and one NBFC) have been able to outperform the industry because of a combination of: a) a strong liabilities franchise with favorable Assets Liability Management (ALM) profile; b) comfortable capital adequacy ratios; c) superior quality of loan book compared to their competitors; and d) superior collections capabilities vs peers,” he has said.
Which are the other multibagger stocks in the Little Champs portfolio?
Saurabh has provided a succinct investment rationale for all stocks in his portfolio.
Bullish on Ultramarine Pigments
3 line break chart gave buy signal at 191 levels on 3rd June
Fundamental snap shot attached
Stock part of little champ PMS
scheme of Saurabh Mukherjee
Accumulate on dips around 195
Dis-recommended to client pic.twitter.com/fUZQh0Npxl
— Rakesh Bansal (@iamrakeshbansal) July 6, 2020
|Little Champs portfolio composition and brief description|
|Garware Technical Fibres||Starting out as a supplier of cordage products to domestic fishing and shipping industries, the Company successfully diversified into sports, aquaculture and other sectors across global markets backed by strong product innovations and customer connects. Value added products now account for >60% of total revenues.|
|GMM Pfaudler||Dominant supplier of glass lined equipments (GLE) to the domestic pharma and chemical industries backed by technology from parent Pfaudler (a global leader). Successful diversification into adjacent products helped by strong customer relationships in core GLE portfolio. Profitability and RoCE metrics significantly ahead of peers as the latter have been devoid of scale in India.|
|Alkyl Amines Chemicals||Leader in supply of aliphatic amines to pharma & agro-chemical industries. The company has been successful in expanding its product baskets in higher value-added products on the back of strong R&D strength and focus on the niche amines space.|
|Galaxy Surfactants||Leading olechemical based surfactants supplier to Home/personal care players in India (-60% mkt share) with strong global presence (2/3rd revenues outside India). Enjoys strong patronage of leading customers like Unilever, P&G etc backed by quality, consistency and innovation capabilities.|
|Ultramarine & Pigments||A global top-3 supplier of Ultramarine Blue pigment with strong inroads into export markets in recent years. The company is also a leading supplier of surfactant particularly to South India based FMCG players.|
|Amrutanjan Health Care||Second largest player in the head painbalm category (-65% of revenue). The Company commands high market share in certain states like Tamil Nadu (traditional market with >5096 market share), Kerala, Orissa and West Bengal. In the recent years, the company has also diversified into newer segments such as body pain balm, sanitary napkins (Comfy brand) and beverages (Fruitnik brand).|
|Mold-Tek Packaging Engineering||Leading supplier of injection moulded rigid plastic containers to paint and lubricants industries with a strong presence across all leading players like Asian Pain., Berger, Castro!, Shell etc. Competitive advantages surround innovation and backward integration (in-house moulds, label development) which places company in a strong position to capture market share particularly as In-Mold labelling shift takes place in Food & FMCG packaging.|
|Suprajit Engineering||A leading supplier of mechanical cables to domestic 2Ws, the Company has been able to make inroads into domestic and export PVs in recent years helped by its immense cost advantages over MNCs in both domestic & global markets.|
|PPAP Automotive||Leading supplier of weather strips to the domestic PV industry helped by a strong Japanese technical partner and backward integration (in-house tools etc). Looking to increase content per vehicle through diversification into automotive plastic parts.|
|Sterling Tools||Second large. Indian automotive fasteners supplier (largest in North India), company is now looking at penetrating the southern based OEMs through a new plant commissioned in Karnataka. The Company is also looking at enhancing product and process capabilities through tie-up with Meidoh, a leading fasteners player in Japan.|
|Lumax Industries||Largest automotive lighting supplier in India backed by strong technology partners (Stanley, a co-promoter in company and S L Corporation) and a diversified presence across vehicle categories & OEMs.|
|V-Mart Retail||A leading retailer of low-ticket apparels in North India particularly in Tier 2/3 locations. Strong financial performance (amongst the best RoCE generating retail company in India) backed by superb inventory management, calculated .ore expansions and investments into technology.|
|La Opala||A Leading supplier of opalware with >5096 market share. The company has been primarily responsible for creating/growing the category through investments into manufacturing automation and passing on the ensuing cost benefits to bring down the price gap vs large incumbent tableware categories like steel and plastic.|
|Music Broadcast||Second largest Radio FM player in India. Growing focus on tier 2/3 cities helped by strong parentage (owned by Jagran Prakashan, a leading newspaper publisher in Hindi Heartland) and conservative capital allocation has led to significant outperformance over peers.|
|DCB Bank||A SME/ MSME focused lender with strong asset quality track-record. Over 95% of the loan book is secured with high degree of granularity. Improved productivity of branches set up in recent years to aid earnings growth and RoE improvement.|
|MAS Financial||Gujarat headquartered NBFC lending to SME/MSME via two models – direct lending and lending to NBFCs which in turn lend to SME/MSMEs. Unique business model of lending to NBFCs on the asset side and building liability side by way of assignments, thereby enabling it to make large NIMs with NPAs of under 1%.|