According to a newsletter issued by Saurabh Mukherjea’s Marcellus PMS Fund, the following are the additions and exits:
Changes to the Little Champs PMS model portfolio (as at March 31, 2024)
Additions to the portfolio:
1. Eureka Forbes
Eureka Forbes (or EFL) began operations in 1982 as a JV between Forbes and Campbell (a Tata Group company) and Electrolux (Sweden) by introducing a range of vacuum cleaners (EuroClean). However, it’s now famous and most significant introduction came in the space of water purifiers (WP) in 1984 in the name of Aquaguard, making them the first ever WP producer in the country. EFL was part of the Shapoorji Pallonji Group until February 2022 when EFL was carved out from its parent, listed on the stock exchange, and whose majority stock (72.56%) was bought by Advent International, a private equity firm (out of this, Advent recently offloaded 10% stake in the open market). The intent was to turnaround the company given its strong positioning in the WP space by bringing in professionals and streamlining operations. Its current CEO, Mr. Pratik Pota was part of Jubilant FoodWorks previously and since his appointment in August 2022 has built a team of professionals over the last 1-1.5 years.
Marcellus has identified several levers for earnings growth for EFL over the next 5 years:
– Increase in WP category penetration in households (currently ~5%) backed by improved tap water supply/electricity, increased product awareness and initiatives undertaken by WP companies to make the product affordable (rental model, financing etc).
– Competitive advantages around brand, an established sales distribution channel and shaking off the complacency/lethargy of the past by focussing on product innovations should hence forth enable EFL to maintain its market leadership in WPs.
– Greater focus on higher margin service AMC and spares through lowering the entry points for AMC, taking initiatives to plug grey market proliferation and increasing share of modern trade.
– Scope for margin expansion through improving AMC mix, better vendor pricing from higher volumes and focus on reducing overheads.
It expects to see a healthy earnings growth trajectory for the Company in the next few years. The Company also enjoys a strong negative working capital cycle thanks to AMC payments received in advance. Any attrition in senior level management represents key risks to the above investment thesis.
I-Sec has recommended a buy of Eureka Forbes on the basis that the penetration for water purifiers across India is only 5% & so there is healthy long-term growth potential. Eureka has strong brand equity and established distribution. There are strong business tailwinds. Target price is ₹650 (Download Eureka Forbes research report by I-SEC)
2. Godrej Agrovet
Godrej Agrovet is a diversified agriculture company, that is involved in manufacture and marketing in the following segments:
– Animal Feed – cattle, aqua (fish, shrimp) and poultry;
– Vegetable Oil (Crude Palm oil);
– Crop Protection and Science (Herbicide, Pesticide and through 64.8% owned subsidiary – Astec LifeScience);
– Dairy through 51.9% owned subsidiary Creamline Dairy Pvt. Ltd.; milk and milk products); and
– Poultry and Processed Food (live chicken, Real Good Chicken, Yummiez) carried through 51% JV.
Since its Initial Public Offer in October 2017, the Company witnessed muted trends in profitability (FY18- 23 EPS CAGR of 6%) impacted by Covid-19 and volatility in commodity prices (finished products as well as inputs). However, Marcellus expects a much better outlook for the Company’s earnings going forward driven by favourable government policies such as National Mission on Edibile Oils – Oil Palms (NMEO-OP) and Pradhan Mantri Matsya Sampada Yojana (PMMSY) which are likely to favourable impact the growth/earnings of the Vegetable Oils and Fish feed businesses respectively. The Company’s focus on driving value added product sales in the diary business and strong partnerships with Nissan Chemical Corporation, Japan in the crop protection business are also likely to aid the consolidated net earnings growth.
3. Carysil
Carysil started as a manufacturer of quartz sinks (FY23 – 52% revenue mix) & over time diversified into adjacencies like stainless steel sinks (13%), kitchen appliances/bath products (11%) & solid surface tops (25%). Carysil started with Quartz sink exports to Europe and US. Carysil’s customers are building material companies/retailers like IKEA, Grohe, B&Q, Menards, Lowe’s, Home Depot.
Quartz has been taking share from Stainless Steel sinks due to better aesthetics. Marcellus expects Quartz sink market to grow in double digits as market share shifts continue from Steel. Carysil makes quartz sinks through “Schock” technology- globally only a handful of companies have this technology such as Schock in Germany, Blanco in US, Franke in Switzerland, and Carysil in Asia. Schock technology and know-how serves as a strong moat for the company and acts as an entry barrier. Furthermore, out of the above players who have Schock technology, all except Carysil have plants in US or Europe and hence are at a cost disadvantage compared to Carysil. Currently Europe is the biggest market for kitchen sinks followed by North America. It is aiming to further penetrate into GCC (six Arab countries Bahrain, Kuwait, Oman, Qatar, Saudi Arabia & UAE) and India.
Overtime the firm has expanded into adjacencies like premium stainless-steel sinks, quartz surface tops, kitchen appliances (hobs, wine chillers), sanitaryware & bath fittings. Carysil has a history of doing M&A to enter new geographies or new categories in UK & USA at attractive valuations. Revenue & PAT has grown at 25% CAGR and 33% CAGR over FY18-23.
Exits from the portfolio
1. Galaxy Surfactants
Marcellus said it has been trimming the position in Galaxy Surfactants Limited due to the downgrade in the earnings growth expectations owing to persistent challenges around its Africa, Middle East and Turkey (AMET) business and generally weak volume growth across key regions. Given the resultant relatively low IRR expectations, it was further decided to fully exit from the stock.
2. Metropolis Healthcare
The investment team have downgraded their earnings projections for Metropolis on the back of lower revenue per centre from the Tier 2/3 expansions. This results in 1% decline in blended revenue per centre vs its earlier expectation of positive growth in this crucial parameter. Metropolis’ track record on the execution front has been patchy due to management changes/bandwidth issues which doesn’t give us confidence to assign a higher than 30x exit multiple for the stock – further impacting the expected IRR from P/E de-rating. Hence, on a relative basis, it was decided to exit from the stock.
Changes to the Rising Giants PMS model portfolio (as on March 31, 2024)
Additions to the portfolio:
1. Motilal Oswal Financial Services
Motilal Oswal Financial Services (MOFS) is a financial services group which runs various businesses like asset management (both private and public), retail and institutional broking, wealth management and affordable housing finance. The group has been in existence for over 3 decades run by 2 promoters (~70% shareholding) who have been able to compound BVPS at 22% CAGR over the last decade after paying out 20-25% of operating PAT as dividends/buy back. MOFS capital markets business has a differentiated client franchisee and will gain from financialization of savings.
The company’s asset management business is seeing a turnaround in fund performance with majority of funds delivering alpha resulting in resurgence of flows and increase in market share. MOFS has significantly invested in its wealth management business which is now bearing fruits with AUM growth upwards of 35% YoY, its HFC has also seen a turnaround with RoE expected to be above CoE in FY25. Valuations for the group are attractive, adjusted for treasury investments (at 1x book value), core business is available at ~16x FY25E PAT.
Risks – any sharp downturn in capital markets could impact profitability as most businesses within the group are linked to capital markets.
2. Eureka Forbes: Please refer to the write up under the Little Champs section
Exits from the portfolio
1. Galaxy Surfactants: Please refer to the write under the Little Champs section
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