The firm’s success has coincided with a shift in investor preference to larger stocks perceived as safer bets amid India’s credit squeeze and slowing economic growth. A gauge of midcap stocks lost a total of 16 per cent in the past two calendar years after a 166 per cent surge over 2014-2017 period.
Marcellus’s strategy is to identify strongly competitive companies with “clean accounting” that have a long track record of generating returns above their cost of capital, and reinvesting the surplus in the business. The firm contends that India is a unique market in which some companies can dominate their industries for decades, helping create a “fountain of free cash flow”.
Manishi Raychaudhuri, head of Asia Pacific equity research at BNP Paribas, supports that idea. India’s top 100 stocks feature “a disproportionate number” of companies that are able to “generate excess returns without needing to inorganically expand their balance sheet,” he said at a January briefing in Mumbai.
In a presentation, Marcellus named Asian Paints, Maruti Suzuki India and HDFC Bank as examples of such dominant players.
Ranjan said ITC Ltd. is the only stock in the firm’s portfolio that has delivered a negative return. The tobacco firm’s shares are down more than 20% since Marcellus started, with the loss notably accelerating this week after the government raised cigarette taxes on Saturday.
The just-unveiled budget is seen providing little support for smaller companies. That may be a boost for the low-risk, sector-dominating companies that Marcellus focuses on.
“There is a high possibility that our portfolio companies are among the few firms which deliver healthy fundamentals for the next few years,” Ranjan said.