Saurabh Mukerjea backs HDFC Bank, Nestle and Asian Paints; full Q&A transcript
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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Summary
Saurabh Mukherjea, Founder at Marcellus Investment Managers, told CNBC-TV18 that he remains bullish on some of the FMCG names like Asian Paints and Nestle. He also believes no other bank remotely matches up to HDFC Bank. He believes the merger deal between HDFC Ltd and HDFC Bank will be RoA accretive and will aid HDFC Bank to leverage more once the deal is complete.
HDFC twins have had a volatile run the past few weeks. Right after the merger deal between HDFC Bank and HDFC Ltd was announced, the shares of HDFC twins rallied, however, thereafter losing much its fizz.
Rising input costs, inflation, has been putting a dampener for many of the businesses. In fact, some of the fast moving consumer goods (FMCG) companies have had major headwinds to deal with.
However, Saurabh Mukherjea, Founder at Marcellus Investment Managers, remains eternally bullish on some of the FMCG names like Asian Paints and Nestle. He also believes no other bank remotely matches up to HDFC Bank.
In an interview with CNBC-TV18, he shared his views on the FMCG sector as well as on HDFC twins.
Here are the edited excerpts:
Q: I wanted your thoughts first on some of your FMCG favorites, where there are some headwinds which are emerging now, names like Nestle and Asian Paints, which have been underperformers this year. And there have been some headwinds like the inflation and input costs hikes, etc. Your thoughts on whether this is a re-entry opportunity or whether these headwinds perhaps could put a bit of a break on the kind of compounding machines that they have been?
A: I don’t see any issues there. I mean, let’s take Nestle to begin with, it’s compounded 25 odd percent for the last five years, perhaps a little bit more than that on share prices. Profits have compounded 20-23 percent and as we discussed on this channel, for many years, it’s an obviously dominant player in a category that is anything but discretionary. I don’t think baby milk powder is a discretionary consumption category, and given the sort of dominance it has, you might get from quarter to quarter, the management will agonize about cost pressure but when a company, which has a 90 percent market share, has utter dominance in a category, which is a compulsory purchase, you have to chuckle a little bit when the management talks about input cost pressure and you chuckle and you buy some more. So one of the relatively straightforward investments in India 70-80 percent RoCEs in a USD 2 billion category with barely any competition.
In case of Asian Paints, we have seen this again and again over the last 20 years, whenever crude doubles over a two year period, Asian Paints’ operating margins and gross margins hold on rock solid. Typically, when crude doubles, the speculators do exactly what they’re doing, they try to sell Asian Paints and the shares rally very nicely. I think last 12 months, Asian Paints is again around 24-25 percent, long-term compounding has been like that last 12 months.
As we’ve said before, we’re seeing rapid market share gains over the last four-five years and we carry on just buying more of this – both of these stocks every single day really. I can’t see any reason why quarterly margin pressure should be any concern for a long-term investor.
Also Read: Nestle revenue likely to grow 9.5% on hikes in Maggi and milk-based product prices
Q: Let’s get to the HDFC twins. I want to flip the question in terms of your thought process in HDFC Bank around a little bit and ask you what are your thoughts on why both these stocks have been sold recently and actually even before the entire merger etc, the run up and then the sell-off, the selling started much before that. Have you tried to understand what is going on the other side?
A: We don’t spend time thinking about stock price movements. I know what you’re getting at, you want me to get into a discussion on why our FIIs are selling. We honestly don’t lose any sleep about that. We focus on businesses, we do a lot of work on underlying businesses and HDFC Bank as I’ve said, perhaps two weeks ago on your channel, that last five years have been spectacular, both sides of the balance sheet. They have blazed away 20 percent loan book compounding, 20 percent deposit compounding- no other private sector bank has remotely been able to compete with HDFC Bank on both sides of the balance sheet. Alongside that stellar asset quality management, again something no other private sector bank has been able to manage both on gross NPAs and on net NPAs and unsurprisingly, therefore, 17-18 percent RoE outcomes which again, no other private sector bank matches. So you have got to be looking at a class business. Similarly HDFC Limited, a 2 percent RoA, difficult to see too many NBFCs do 2 percent RoA at this scale.
You’re bringing together two good businesses. It doesn’t take a genius to figure out that the the merger is RoA accretive, bring the two businesses which will together have comfortably a 2 percent RoA and it is EPS accretive. The NIMs (net interest margins) will go down because mortgages tend to have lower NIMs but that’s not surprising. It’s RoA accretive and EPS accretive because you’re bringing together two very profitable businesses. And then if you get into the leverage, which is because the Reserve Bank of India (RBI) has lower risk rates on mortgages, I think HDFC Bank will be able to leverage up more once HDFC Limited is merged.
You should be seeing RoEs exceed the current 17-18 percent. HDFC Bank does so. 2 percent RoA stays but we lever up further because of the mortgage book that HDFC has, and you should see RoEs exceed and finally, growth should also go up because currently HDFC Bank hands over the mortgage book to HDFC Limited. As a result, HDFC Bank’s growth is reduced by that because mortgages are run off on HDFC Limited’s book rather than on HDFC Bank’s book and as HDFC Bank holds on to mortgages, growth should also accelerate. So, two good franchises coming together, your RoE goes up, your growth goes up, I don’t see why we shouldn’t be buying more. In fact, we are buying more as we speak.
In all of these stocks, we hold many thousands of these and because I invest in Marcellus’ PMSs, I end up also owning these stocks. So in all of these stocks, I have an obvious self interest in talking about them and laying out our investment.
Also Read: HDFC-HDFC Bank Merger to shake up sector dynamics: Fitch Ratings
Q: This disclaimer is very important and thanks for pointing that out. But there is no denying the fact that some of these operation metrics like RoE and RoA are very strong, especially post the merger. But I think the question arises on the pre-provisioning operating profits, which have been on a slightly weaker side and the argument that one of the analysts was making is that, why should I buy an HDFC Bank with weak pre-provisioning operating profits, when I can perhaps look at something like an ICICI Bank, so it’s sort of like a relative comparison. You wouldn’t agree with that?
A: We have managed 9,000 families’ life savings. We have to back companies which have delivered decade after decade. We’re not having a punt in the stock market staring at stock prices, following which broker is saying what, what are FIIs doing, what are DIIs doing, we’re managing the life savings of 9000 families, we have to back companies who have delivered decade after decade in a stellar fashion. It’s really important to understand that.
Now, I’m not saying ICICI Bank is doing anything less than impressive. I think Sandeep Bakhshi has done a tremendous job at ICICI Bank. But HDFC Bank’s delivery over the last five years, over the last 10 years, over the last 20 years has been in a different league to any other bank, even in the last three years, let alone five years. Even in the last three years, you cannot see any other bank blazing away like this, both sides of the balance sheet, superb asset quality control, great RoEs, nobody else compares and therefore it’s not a speculative punt that we have to get, we’re here to back great franchises, which can compound our clients’ money at 20-25 percent over long periods of time, and give Indian families a good retirement. That’s our job.
Our job is not to say whether ICICI Bank or Axis Bank or anybody else is better or worse. If somebody else wants to have a sort of speculative comparison, I’m happy to engage in that debate but that’s not my job in terms of managing money for Indian families.
Also Read: Pick sectors carefully as inflation, macro headwinds playing spoilsport: Aberdeen
Q: The other point, which has been raised is that for a lot of these financial institutions, it’s about the active leadership and, of course, Mr Aditya Puri did a great job at HDFC Bank and Mr Keki Mistry at HDFC. But now, HDFC Bank has transitioned and Mr. Mistry also, perhaps, over the next two years or so, will retire. So the issue is, would the new leadership be able to take along this behemoth and continue to produce the kind of results that they did over the last five or six years or so. You don’t think that’s a worry?
A: We’ve monitored very closely, the succession planning that HDFC Bank did in the run-up to Aditya Puri’s retirement. We have monitored very closely how Sashi Jagdishan was mentored by Aditya Puri. In fact, I used to work in the building next door to HDFC Bank’s headquarters at that time. So I got a pretty close view of how assiduously, how carefully, Sashi Jagdishan was mentored and trained by the erstwhile CEO.
As I said, if you look at operating metrics from the time Aditya Puri left and from the time Sashi Jagdishan took charge, the operating metrics are stellar, and underlying on the ground performance; you cannot fault them. They are growing at a rate which I haven’t seen any large bank grow anywhere in the world, forget India! To make a bank this scale to roar away 20 percent both sides of the balance sheet is a pretty big deal. And under Sashi Jagdishan so far, the delivery has been impeccable on asset quality and on growth. So yes, we look at these issues very carefully. Succession planning is a big priority for Marcellus. But so far, both in the run-up to Aditya Puri’s retirement and post that, once Sashi Jagdishan has taken charge. I think so far, he has delivered 10 out of 10.
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