So, how does one identify the potential new compounders to reap the benefits in the future?
The primary market is hot and many unicorns are headed for Dalal Street. Will some of these become new compounders?
“Yes, many of these are consolidating and are on their way to become master franchises. But no matter how good a business is, if it is not making money, stay away,” says Saurabh Mukherjea, seasoned fund manager and founder of Marcellus PMS.
Typically in a 10-year period, Nifty churns by around 50 per cent — half the names on the index are broadly gone in a decade.
“As we have seen in the last 10 years, old style conglomerates, old style setups will gradually get relegated to the sidelines of the market,” Mukherjea said. He said the core competitive advantage of the old style conglomerates was their ability to have a good connectivity with the political ecosystem.
“But their ability to keep up with the master franchises is gradually decreasing. A new generation of companies with superior technology, superior governance, superior ability to drive growth at 20-25 per cent are emerging and that’s what we are seeing now,” he said.
Mukherjea says the top 10 master franchises today account for 90-95 per cent of profits In India. “The stock market has 6,000 stocks, but just 15-20 companies make all the money in the market. Around one-third of those 15-20 names will have a rough decade between 2020 and 2030 and four-five new names will emerge,” he said.
As the unicorns start on their path to becoming master franchises, many are consolidating and formalising various sectors of the economy, which were hitherto fragmented. “So whether it is home deliveries or grocery shopping, buying cosmetics or education or poultry, the defining signature of many of the unicorns is consolidation and formalisation. But that does not mean all will make money,” Mukherjea said. “We will see a few more InfoEdges coming through over the next decade or so, and in a way they will slot in as the old style conglomerates gradually get pushed out of the index,” he said.
So should one get excited about the Zomatos and the Policybazaars of the world or should one stick to buying Mukherjea’s favourites like Pidilite, Asian Paints or Dr Path Lab?
The Marcellus chief investment officer said he is an absolute believer in India’s economic recovery. “We are in the early stages of a potential four-year economic takeoff driven by China plus one, the lowest cost of money ever seen in our country and constructive policies,” he said.
Among the new generation franchises, some are already generating free cash flow, some are not. And Mukherjea says he does not believe in franchises that do not generate free cash flow.
“We need to look for companies that can put on the table cash generated from a business. However good a business is, if it is not making money, stay away. Some of the consumer tech franchises are generating lots of cash flow,” he pointed out.
“Those IPOs will come. Be patient and wait for them. Do not get excited about getting pulled into the hottest tech IPO, just because the marketing around it is very sexy,” he warned.
