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 revealed the names of four of these stocks and offered valuable clues so that we can decode 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 maintained a studied silence about the other stocks in his portfolio though he has given clear hints as to the names of these stocks.
According to Rakesh Bansal, an expert, Ultramarine Pigments is one of the stocks in the Little Champs 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
Some of the other stocks appear to be La Opala, Suprajit Engineering, ENIL or Music Broadcast, etc.
However, we will have to await official confirmation from Saurabh before entrusting our money to these stocks!