Analysis of impact of #Covid19 on 6 Consistent Compounder Stocks (Pdf + Video) By Marcellus PMS Fund

Analysis of impact of #Covid19 on Consistent Compounder Stocks (Pdf + Video).

Consistent Compounders Outperform during periods of market stress. Staying invested in great franchises is the most prudent apprach in such times of uncertanities

RISE IN SHORT TERM UNCERTAINTIES – IMPACT ON OUR PORTFOLIO COMPANIES

Short-term negatives

•Concerns around spread of coronavirus

•Few countries under lockdown

Short-term positives

•Crude oil price fall – positive for several portfolio companies (like Asian Paints, Berger, Pidilite etc)

•Stimulus from central banks globally?

Impact on CCP companies:

Impact on demand: Our portfolio companies’ sell products and services which are small ticket essentials consumed on a day to day basis predominantly by middle class households in India. This demand is not affected by Coronavirus in a meaningful manner even in the short term.

Impact on supply: Exposure to raw material imports: 06 out of the 13 companies in our portfolio import up to 25% of their raw material (not much from China though) – bulk of which can be substituted with alternate sources

•Asian Paints & Berger: Titanium Dioxide (TiO2) is a key RM for paint companies and forms ~20% of their RM consumed. Our sense is that China accounts for over 40% of global TiO2 capacity.

•Pidilite: VAM is a key RM for Pidilite and forms ~15% of RM consumed. Pidilite has in-house VAM manufacturing capacity. However, it is currently importing VAM rather than making it in-house due to cost viability. Our sense is that China accounts for ~15-20% of global VAM capacity and the balance capacity is spread across USA & Europe.

•Page Industries: Page imports Elastic, Synthetic yarn and other accessories which forms ~15% of its COGS (cost of goods sold). Globally, China is one of the larger producers of these products

•Relaxo Footwears: Ethylene Vinyl Acetate (EVA) and Polyutherane (PU) are key RM’s for Relaxo and forms ~35% of Relaxo’s COGS. Our sense is that the major part of global capacity for these products is located in Western countries (Dow, Du Pont, Basell etc.) and China is a net importer of these commodities. India imports most of its EVA & PU requirements

•Divis: Divis procures some of its key RM’s from China, but is in the process of setting up backward integration for such RM’s which should operationalise in the coming quarters

STAYING INVESTED IN GREAT FRANCHISES IS THE MOST PRUDENT APPROACH IN SUCH

TIMES OF UNCERTAINTIES

The most frequently asked question is: “Why don’t we just sell everything and wait this out? Get back in when the dust settles?”

•We do NOT know how long and how sharp will be the stress in the broader stock market.

•However, Marcellus’ PMS portfolio stocks are likely to demonstrate resilience given their robust fundamentals compared to the broader market.

•Also, please note that recovery in the broader markets after the 2008 crash or demonetisation crash or IL&FS crash happened much before fundamentals for the broader market started recovering.

•Hence, the idea of trying to time entry and exit from equities during periods of market stress has greater probability of failure than success.