August8 , 2022

saurabh mukherjea portfolio: What Bajaj Finance did in 2020, can Dr Lal Pathlabs do in 2022? Saurabh Mukherjee answers

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“If one takes the bullish view as we go into auto recovery and economic recovery, with abundant availability of credit, Suprajit and should compound for us at 20% over the next at least two to three years, until the next auto downturn comes along,” says Saurabh Mukherjea, Founder, Marcellus Investment Managers.



What is the best way to look at autos? Is it a play on low commodity prices? A comeback on value? The smile tells me that either you completely agree with me or you completely disagree with me?
I think it is a very difficult sector. We have struggled with autos historically because we have tried to invest in auto thinking that it is a play on consumption, only to realise that the auto manufacturers and the auto ancillaries both the OEMs and the ancillaries do not actually have that much pricing power and they seldom make a good gross cycle return on capital.

Therefore the only way one can make a little bit of money in auto is by timing the cycle perfectly. In a 10-year period, auto will have five, six good years, four or five bad years. If you can get those five six good years you make a decent return, you can make around 20% return per annum. But timing has proved to be difficult and it is one of the few sectors which has not quite worked out for us.

Read Also: India’s main ally in next few years will be reallocation of $3 trillion pumped into China in last 20 years

So if you were to take a positive view of auto and invest in great franchises, in all honesty, we have investments in Eicher Motors and

. We think both are high quality franchises, both have demonstrated an ability to deliver return on capital above cost of capital over long periods of time, smart capital allocators and good competitive advantage.

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So if one takes the bullish view as we go into auto recovery and economic recovery, with abundant availability of credit, Suprajit and Eicher Motors should compound for us at 20% over the next at least two to three years, until the next auto downturn comes along. But the challenge in the sector as you are rightly alluding to is not only dependent on underlying demand holding up, it is also dependent on commodity prices being supportive and as we have learned over the last six months, it is dependent on supplies of things…

What did you accumulate?
We took a leaf out of what we had done in January, February and March 2020 where we loaded up on some of the stuff that had corrected. In late April 2020, we almost doubled up our position in and that worked out for us.

So this time around, we have loaded up heavily on Dr Lal Path Labs which has had a correction very similar to what Bajaj had in that run up to the initial Covid panic. Bajaj almost halved. Similarly, Dr Lal halved over the last six, seven months.

I am curious to know what have you sold in the past two, three months?
When we do these rebalancing where we look for great franchises that we own which have been punished, we obviously have to sell something to buy whatever it is that we are buying. So, on this occasion Dr Lal Path Labs is one of the stocks which had done very well for us till five, six months ago. We lightened up and reallocated some money to Dr Lal from Titan. We still have plenty of Titan, but it had done extremely well and we therefore lightened up on

and reallocated some of that money to Dr Lal.

Back in April 2020, when we loaded up on Bajaj Finance, we lightened our

position and Abbot position because in the early months of Covid, Nestle and Abbot had done very well as people had panicked and they had sold Bajaj Finance. We reallocated a good 8% of the portfolio away from Nestle and Abbot towards Bajaj Finance. This time around, we took some money out of Titan and put it in Dr Lal Path Labs.

Just to be clear about this, I own all of these stocks through my Marcellus portfolio as do my parents and our 9,000 clients. So whatever stocks I am talking about owning, we have a strong vested interest in this.

Some would argue that for diagnostics the real hurrah moment was Covid. It was not RTPCR test, it was the additional tests which were compulsory like a D-Dimer test or a CRP test. I hope that business is over forever, nobody wants Covid to come back. But what happens to this sector which got rerated and is now getting rerated? Where will it fit in?
The reason we had invested in the sector long before Covid and the reason we are loading up further on Dr Lal is that non Covid sales are growing for Dr Lal and others at a decent clip. Non Covid revenues for Dr Lal were growing at 15-16% before Covid and they are growing at 15-16% even now. The 15-16% revenue growth and therefore earnings compounding around the 20% mark and free cash flow compounding around the 25% mark that piece we reckon has a very long growth runway. Diagnostics is a $10-billion sector in our country but barely $1.5 billion consists of formalised national chains like Metropolis, Dr Lal Pathlab etc.

85% of the sector is still a mom-and-pop show and therefore there is a natural consolidation play that will happen here which the strongest free cash flow generator, which is Dr Lal Pathlab, should benefit from. Leaving that aside, one of the big benefits of Covid has been one can see greater focus by people on their health. So an ancillary benefit has been that health insurance has risen dramatically post Covid and as people come out of Covid with a greater focus on health, they are hoping that the whole health and wellness aspect of diagnostics also comes forth in executive health checkups and so on.

So this is a structural driver which is formalising the sector away from mom and pop shops towards national chains like Dr Lal. Secondly there is a lifestyle aspect which I agree at this stage is a little bit of a conjecture on our part, but it does look like there seems to have been a shift in peoples’ spending habits. They are placing more emphasis on their health and therefore the wellness aspect of diagnostics should come to the fore. There is plenty to play for. We are not looking for any Covid benefits to be associated with this name. It is a company with mid teens earnings growth, 20% earnings and 25% free cash flow compounding and we can make a lot of money here.

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