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Saurabh Mukherjea stocks: Saurabh Mukherjea missed the commodities rally happily. Here’s why

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Saurabh Mukherjea, Founder, Marcellus Investment Managers, says he has never invested in mining and metal stocks in his career. Edited excerpts:


Some big IPOs are slated to hit the market this year. What are your thoughts on them?
I am very happy that LIC IPO is coming. With a massive IPO like that, the market will be in good humour. At many levels, the IPO will be a watershed event for the Indian market. It is probably the last big PSU owned by the government which will go public.

There are other interesting IPOs coming. It is a sign of risk appetite. My reckoning is that this will probably be the strongest year for IPOs since FY 2007-08. Finally, we are seeing good companies with strong investors behind them. Strong franchises like LIC and Zomato are heading to the market.

Where is the commodity cycle headed?
Look, I am not a commodity expert. I have never invested in metals and mining stocks in my career. But from what I can see, you still have a supply-demand mismatch i.e. demand outstrips supply. Capex announcements have been made by steel plants in the last 3 months but the new supply has not yet fructified.

Until the new supply fructifies, which is probably two to three years away, it is difficult to see why there will be a big abatement in supply-demand mismatch seen globally. I do not fully understand what is happening in China. China will obviously be a big part of this commodity cycle but I have not heard of new steel plants or aluminium plants coming on stream, whether in India or anywhere else in the world, in the last 8-9 months. All we have heard is the booming demand for cars and industrials. Therefore, a finite supply of commodity means rising demand and the inevitable implication is rise in prices.

I am quite surprised and shocked to hear that you have never invested in a metal stock. You completely missed out on the rally then?
Absolutely. We are happy to miss out on such things. We have got large companies where we get free cash flows compounding at 30% regularly. The free cash flow of Page Industries compounded at 35% in the last five years. Asian Paints, one of my favourite stocks, gave us free cash flow compounding at 20% in the last five years. We have had Titan giving us free cash flow compounding at 45-50% in the last five years. We prefer to stick to that game of steady wealth generation, rather than use our limited brain power to figure out the commodity cycle. We are no experts in commodities and so we keep away from metals and mining stocks.

Which are the stocks where you think the earnings have grown and markets are not recognising them and the leave period is about to get over?
Look at front-ranked financials – HDFC Bank, Kotak Mahindra Bank, Axis Bank and Bajaj Finance. In the last four years, the compounding across HDFC Bank, Kotak, Axis and Bajaj Finance will be in the vicinity of 19-20%. But I do not think that their share prices have compounded at 20% for four years. Hence, it makes them all the more seductive for us. We are going into an economic up cycle. The tier-1 ratios of these four lenders would be around 20%, so they are appropriately capitalised. Going into a strong recovery, they would not need to raise capital for the entire economic up cycle. This trade in top quality lenders with strong balance sheets and sensible capital allocation is a far more appealing trade than trying to time the metals and mining cycle.

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