So how do you identify potential new compounders to reap the benefits in the future?
The primary market is hot and lots of unicorns head to Dalal Street. Will some of them become new compounders?
“Yes, a lot of them are consolidating and are on their way to becoming master franchises. But no matter how good a business is, if it’s not making money, stay away,” says Saurabh Mukherjea , seasoned fund manager and founder of Marcellus PMS. .
Typically, over a 10-year period, Nifty loses around 50% – half of the names on the index have all but disappeared in a decade.
“As we have seen over the past 10 years, old-fashioned conglomerates, old-fashioned setups will gradually be relegated to the margins of the market,” Mukherjea said. He said the main competitive advantage of old-fashioned conglomerates was their ability to have good connectivity with the political ecosystem.
“But their ability to keep pace with master franchises is gradually decreasing. A new generation of companies with superior technology, superior governance, superior ability to generate 20-25% growth is emerging. to emerge and that is what we are seeing now, ”he said. noted.
Mukherjea says the top 10 top franchises now account for 90-95% of profits in India. “The stock market has 6,000 stocks, but only 15 to 20 companies make all the money in the market. About a third of those 15 to 20 names will have a tough decade between 2020 and 2030 and four to five new names will emerge,” he said.
While the unicorns embark on the path of master franchise, many consolidate and formalize various sectors of the economy, until then fragmented. “So whether it’s home or grocery deliveries, cosmetic, education or poultry purchases, the defining signature of many unicorns is consolidation and formalization. But that doesn’t mean that everyone will earn money, ”Mukherjea said. “We’ll see a few more InfoEdges coming in over the next decade, and in a way they’ll fit in as old-fashioned conglomerates are phased out of the index,” he said.
So, should we get excited about the Zomatos and political bazaars of the world or should we stick to buying Mukherjea favorites like Pidilite, Asian Paints or Dr Path Lab?
Marcellus’ chief investment officer said he strongly believes in India’s economic recovery. “We are in the early stages of a potential China-led four-year economic take-off, the lowest cost of money ever in our country and constructive policies,” he said.
Among the new generation franchises, some are already generating free cash flow, others are not. And Mukherjea says he doesn’t believe in franchises that don’t generate free cash flow.
“We need to look for companies that can put the cash generated by a business on the table. No matter how good a business is, if it isn’t making money, stay away. Some of the mainstream tech franchises generate a lot of cash flow, ”he said.
“These IPOs will come. Be patient and wait for them. Don’t get carried away by participating in the hottest tech IPO just because the marketing around it is so sexy,” he warned.