Saurabh Mukherjea has added two new small-cap stocks to Little Champs portfolio & downgraded one

Discussion in 'Portfolios Of Famous Investors' started by Arjun, Mar 5, 2022.

  1. Arjun

    Arjun Chief Executive Officer (CEO) Staff Member

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    Saurabh Mukherjea of Marcellus has announced the addition of two new stocks to his Little Champs portfolio.

    These are Paushak and Tarsons Products.

    Saurabh has provided a succinct explanation about the merits of the two stocks and why they were included in the portfolio of Little Champs.

    Paushak

    Paushak is the leading supplier of phosgene derivatives in India. Phosgene derivatives are some of the most basic & essential industrial chemical compounds that find application in multiple industries like pharmaceutical, agro-chemicals, personal care, etc. Owing to the highly hazardous nature of phosgene, the licensing regime in India is very stringent and this creates barriers to entry. These regulatory barriers to entry coupled with Paushak’s focus on specialty phosgene derivatives, its professional management team and continued R&D for producing more complex and value-added derivatives have enabled Paushak to grow its Revenues and PAT at ~17% CAGR and ~26% CAGR respectively for the last 10 years ending FY21 (for the 3 years ending FY21, revenue & PAT growth is 11% & 21% respectively). Paushak’s healthy growth has been accompanied by an average pre-tax ROCE of ~24% over the last 10 years (~21% average in the last 3 years).
    Tarsons Products

    Tarsons Products

    Incorporated in 1983, Tarsons Products is engaged in the manufacturing of Plastic Labware Products and sells these products in India as well as in the export market (which accounts for a third of the firm’s revenues). The main customer segments for the company are research organizations, academia institutes, pharmaceutical companies, Contract Research Organizations (CROs), diagnostic companies and hospitals. Tarsons’ leadership in the Indian plastic labware market is underpinned by its in-house manufacturing capabilities and a strong distribution network. Manufacturing the product in-house has enabled the company to price its products very competitively. The precision required around manufacturing a large number of SKUs and the capital-intensive nature of the business act as high barriers to entry in the domestic market. On the other hand, the niche size of the industry (total revenues Rs12 bn) makes it unfeasible for MNC manufacturers to commence manufacturing in India. The company has grown its revenue at 13% CAGR over the last 5 years (FY16-21) and PAT at 49% CAGR with average ROCEs of 30%. With its new plant, Tarsons is expanding its capacities by more than 2x and is also expanding into new segments like Polymerase chain reaction (PCR) and Cell culture which are currently dominated by MNC players in India.

    Removal of Lumax Industries from the portfolio

    Sadly, Lumax Industries could not meet the exacting standards of the Little Champs portfolio and was given marching orders.

    Saurabh has explained the rationale as follows:

    The key reasons for this exit are:

    - Increased competition in the passenger vehicle automotive lighting industry particularly in the new age LED technologies. Lumax has incurred capital expenditure of close to Rs5,347 mn from FY17 to FY21. Rising competition raises concern surrounding the return on this incremental capital employed and thus the overall blended RoCE of the company.

    - In light of the above, we have downgraded Lumax industries’ longevity scores and earnings growth forecast. This results in the stock sliding down the ladder in the Little Champs stock selection and position sizing framework.


    Spotlight on Ultramarine & Pigments Limited:

    Saurabh has provided valuable information on Ultramarine & Pigments Limited, a key stock in the Little Champs portfolio.

    Ultramarine & Pigments Limited is a top 3 global manufacturer of inorganic Ultramarine Blue pigment (and the leader in India and Asia-Pacific) and amongst the top manufacturer of anionic surfactants in India. Ultramarine’s pigment business enjoys significant manufacturing complexities around yield, purity and consistency particularly for industrial grade pigments. The surfactant business enjoys locational advantages since Ultramarine is the only large-scale surfactant player in south India. Helmed by technocrats, the company is focused on enhancing the product mix in both pigments (high performance pigments like Ultramarine Violet) and surfactants (specialty products for personal care) thus increasing the entry barriers. New environmental regulation is the key risk for this firm, he has added.

    More information about these stocks can be obtained at the Marcellus website.
     
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