What is happening within the entire banking space because it is not only the frontline names that are taking leadership but across the board, we have seen quite a bit of fervour within this space. Do you believe that investors should look to diversify across the board – be it midcap names, NBFCs, insurance etc. or should the core of the portfolio remain largecap banks?
The best way to think about investing in any sector in India is to look for the strongest companies. Our country does have a fairly pronounced business cycle and one should have the strongest companies in your portfolio when the business cycle weakens. At the moment, the business cycle is nicely picking up momentum. One day the business cycle will weaken and if you do not have the strongest players, then you could get beaten up in the downturn of the business cycles.

We have historically gone for the strongest banks and NBFCs, the Bajaj Finances and Cholamandalams on the NBFC side; HDFC Bank, Kotak, Axis Bank among banks.

Over the last couple of months, for the first time in Marcellus’s history, we have built a meaningful position in Smart TalkNSE -0.93 % and will carry on building that position. Amongst the smaller lenders in Kings of Capital, we have Home First and MAS Financials as well. The picture is pretty clear as the economic recovery becomes broad-based, as credit offtake picks up well, lenders with strong balance sheets should have a good couple of years ahead of them.

Since you mentioned Home First, why was there an exit from La Opala?

In La Opala’s case, we have been long standing shareholders and big fans of what Mr Jhunjhunwala has done there, built a category from scratch. It is just that we have concerns over the last two to three years on the scaling up of distribution. So the product is fabulous. Personally, I am a user of the product but in India if you want to take a product pan India, you have to consistently muscle up on distribution. In the east zone and north, they are strong on distribution. But we were getting a little concerned about the distribution in the west and in the south as we went to the dealers and distributors and did channel checks over the last two to three years.

We were getting a little concerned about incremental muscle there and hence we pulled back on that position. We have made a lot of money on that and we have to thank Mr Jhunjhunwala for pioneering that category. Incrementally, I think companies like NSE 0.97 % will give them some competition but it is still a category that is large enough for two credible players – La Opala and Borosil – to make money. I just hope that they muscle up on distribution and do justice to the quality of the product that is literally put on the table.

Going through your recent additions and exits, I see that you have added ICICI Lombard General and Home Finance we have talked about. You also exited Abbott India. What is the thesis?

We built up a position in ICICI Lombard. We had a smaller position last year. It has been ramped up significantly over the last six months as Mr Panda has come in as a regulator and there is a lot of stuff happening in IRDA which is very encouraging for high quality multiline insurance companies like ICICI Lombard. We hope to make more money from it in the years ahead. Kudos to the regulator for positively shaking things up in the insurance sector.

In the case of Abbott India, a couple of things have worried us over the last year or so. The first is Duphaston. Duphaston is a critical product for Abbott, it is a product that pregnant ladies take. It was a monopoly product until a local player came in and launched an equivalent product at one-fourth the price which obviously led to rapid erosion in Abbott’s market share and therefore in cash flows and profitability. It was worrying to see how quickly the Duphaston monopoly got eroded.

The other pieces are changes in the boardroom. In the last five years, if I am not mistaken, there were three changes in the top role and that sort of board room churn is always a little concerning. This is a highly competitive market. It is the world’s fifth largest economy and for market leading franchise,s to see three changes in the top role in five years worried us and hence the exit. We held it for a good three and a half years or so but a couple of those changes triggered its exit from Marcellus’s portfolios.

When it comes to autos you continue to talk about Suprajit as well as Eicher Motors. Is anything else looking interesting, say four-wheeler players, some of the other largecaps? Why not the M&M or Maruti Suzuki which are looking for an EV foray like Tata Moors?

A quick caveat, all these stocks that I am discussing, we own them in our portfolios. I personally invest in these portfolios. I own them, as do my parents and my colleagues are also heavily invested in them via Marcellus portfolios.

The auto OEM recovery seems to be on its way. I am not sure the auto OEMs are roaring quite yet but at least the last four-five months’ numbers suggest that the auto OEM recovery is nicely entrenched and it is great to see the semiconductor shortage issues are largely behind us.

If one looks at the commentary from the semiconductor makers in Taiwan, there does not seem to be any shortage issues anymore and therefore supply side issues for OEMs are behind us. What is a little bit more perplexing is that the ancillaries’ recovery is not as pronounced. The ancillaries still have a degree of margin pressure to contend with.

Our reading of the situation is given that the OEMs are performing well with a little bit of a lag, the ancillaries should come through and Suprajit remains our play there. Probably the best capital allocator in Indian auto ancillaries, Ajith Rai and team, consistent ROCEs north of 20% which is very difficult to get in auto ancillaries and a world leading position in cables going into the auto industry and indeed in light duty cables.

So we are staying with Suprajit in our Rising Giants portfolio and in our midcap portfolios. It is a significant play and our hope is that as OEMs numbers continue perking up, players like Suprajit will benefit.

Eicher Motors has been a long standing holding in some of our portfolios for the best part of four years. Royal Enfield’s numbers are coming back after Covid. Siddhartha Lal has run the business very well for over more than a decade. I would say it is the only credible player in the premier end of the motorbike market.

You asked why not M&M or Maruti Suzuki? We have struggled to understand their pricing power. Unless one can charge premium prices, one is not going to make 30-40% ROCEs. If you do not make hefty ROCEs, then the ability to reinvest in growth in what is becoming increasingly a capital intensive sector for the reasons you mentioned is less. If you want to do EV well and you have consistent upgrade cycles which are world class, you need to have hefty pricing power.

It is not evident to us that beyond Royal Enfield and Eicher Motors, there are too many Indian OEMs who command premium pricing which becomes an issue in generating sustainable growth in free cash flow compounding.