India to benefit from China plus one theme; lower interest rates driving realty sales: Saurabh Mukherjea

Saurabh Mukherjea, founder, Marcellus Investment Managers, is of the view that there are three themes including China plus one, low cost of capital and world class technology, that are coming about nicely with the flavour of the recovery in the market getting more interesting as months go by.

Mukherjea said, “China plus one as a theme is going to really big than first thought about. Even small textile companies, small API manufacturers are getting a lot of business on the back of global buyers having a clear priority to build India as an alternative to China. Also, things like what the Chinese Premier is doing with the crackdown on capitalists there like Evergrande etc., is driving China plus one theme to a different level altogether. China plus one is going to be a huge theme in the next two to three years, as India gets lined up as a potential alternative to China by global buyers.”

“The second theme is the lowest cost of money ever in India. Whether it is for taking a home loan or for building a factory, we have never seen a credit cost so low in our country -- 6.5-6.6 percent home loans are something new and that is driving activity in the house buying market,” he said.

He further said, “The third theme is that this is the first time in recovery, we are coming out of a difficult situation like COVID, we are coming out with world class technology available to companies, even small companies. The software as a service (SaaS) model means that companies as small as Marcellus can access world class technology at a very, very low cost. If you put these three things together, China plus one, low cost of capital and world class technology available to Indian companies, it creates for a very interesting set of circumstances over the next two to three years and we are trying to figure out the full implications of this. This looks to be the beginning of a good two, perhaps a four-year economic recovery with obvious implications for the stock market.”

He said Marcellus has played the low cost of capital theme through building materials companies and not through real estate developers. “We own companies like Asian Paints, Pidilite Industries in some of our portfolios, and we are looking to add more building materials companies. In every theme, just because the theme is playing doesn't mean every stock will make money, you have to look for companies whose franchises are very hard to replicate. The real estate developers’ franchise is not very hard to replicate. Although there is formalisation in the real estate developer market and there is consolidation, it is very difficult for real estate developers anywhere in the country to deliver a return on capital significantly above their cost of capital. And hence, that's the sector will steer clear of, while the building materials industry we think we'll carry on booming right through the next two-to-three-to-four years as people buy more flats, houses, paints, pipes, and perhaps other building materials companies should do well as this home-building recovery continues,” said Mukherjea.

On chemicals space, he said, “We think we are just beginning this story. Taking Alkyl Amines as an example, China's API production capacity is 10 times that of India. So if on that, due to China plus one strategy, even if 10 percent of the Chinese API capacity shifts to India, our API industry will double in the next two to three years. So, if you're an API manufacturer in India, you need aliphatic amines and Alkyl Amines is the largest supplier. It is very difficult to enter the market and start making aliphatic amines, the barriers to entry is formidable, both around technology and getting a hold of the right premises and so on.”

“Therefore, China plus one should mean that the API industry doubles in the next three, four years. And if you are going to make API in India, you need the output from Alkyl Amines. For this company, the profits have been compounding in the last three, four years at around 30-35 percent. But free cash flows have been compounding at 40 percent. It is an efficient company, well-run and in absolute pole position to benefit from this,” he said.