India's main ally will be reallocation of $3 trillion pumped into China in last 20 years: Saurabh Mukherjea

“We are considering reducing some of our exposure to the brokerage sector and loading up further on the lending sector, but that has been an ongoing process over the last year . So we will potentially carry on doing it and increasing our exposure to high quality lenders. We will see a very good two to three years for all the lenders that we are invested in,” says Saurabh Mukherjea, Founder, Marcellus Investment Managers.

It is getting increasingly clear that the commodity super cycle which everybody called lasted for only 18 months. It was supposed to be a multiyear super cycle but it got punctured in 18 months. If the commodity cycle is reversing, will it have serious implications for us?
It is a little too early for us to know which way commodities are going. We at Marcellus have no privilege knowledge about what is going to happen to commodity prices but if we are heading into a recession/slowdown for the western world – which the western central banks seem determined to create – then it logically stands to reason that commodity prices will continue cooling like they have done for the last three months and that is bound to be good news for our country, given we import more commodities than we produce internally.

So from April, as the Fed continues hiking rates and shows greater determination to push America into at least a slowdown if not a recession, the odds are that commodities will cool off and by and large that is a good thing for India.


I will start with IT which was the best outperforming sector for 2021 and has now become a laggard. Are markets getting nervous about business or is this pure PE or mean reversion which is happening in IT stocks after a wonderful out of park performance in 2021?
I am not so sure about the mean reversion piece because if it is PE multiple jagging around, I do not think there is any point in us losing too much sleep about that but yes, there has been plenty of talk that order books of Indian IT services companies and the global IT services companies will shrink in light of the US recession.

But it has been just talk and we have not seen any evidence either from Accenture or from TCS or indeed even from say a company like TSMC Taiwan Semiconductor. We have not seen any tangible evidence of a material slowdown in tech spending by fortune 500 companies and so far, it has just been speculation that there will be a slowdown in IT spending. Not a single IT company that I have spoken to or that has announced results, has shown any weakness in their order book.

As far as the banking franchise goes and once you look at dominant players, HDFC is of course in your list and we saw HDFC Bank results. It was the only stock yesterday in the red from the Bank Nifty. I know you take much longer term calls and want to play test cricket rather than 20:20 but for the banking pack, finally the momentum is coming back. How are you approaching it?
We remain invested in HDFC Bank, I thought there were solid results. Similarly we remain a large investor in Kotak Bank, Bajaj Finance, Cholamandalam, Aavas Home Financiers as we have discussed before going into a solid economic recovery with the cost of money being lower by historical standards. What we currently have is a very low cost of money. We will see a very good two to three years for all the lenders that we are invested in.

Are we putting more money to work? Yes, we are considering reducing some of our exposure to say the brokerage sector and in loading up further on the lending sector but that has been an ongoing process over the last year . So we will potentially carry on doing it and increasing our exposure to high quality lenders because as you said, there is a combination of good credit growth, low NPAs as evidenced by HDFC Bank’s results and bank’s provisions being released by HDFC Bank. So there are good credit conditions, low stress in the system. Almost all high quality lenders have excess capital and over a two, three, four year economic upturn, they will shift that excess capital into the capital base. We are hoping to make a lot of money in this sector.

What happens to telecom now with the entry of Adani in the 5G spectrum auction?
What happens to telecom now is what has happened to telecom for the last 20 years which is it does not make any money because barriers to entry remain relatively low. As we have seen repeatedly over the last 20 years, not just in India, but actually across the world, every time this whole business comes along, one or two players are doing reasonably well. A few more people come in, return ratios for the industry get affected.

Another similar industry is aviation, where one could have very good growth in business volumes over long periods of time. As we have had in India in telecom and in aviation, there are very good growth of business volumes but one does not actually make any money in the sense that return on capital never exceeds the cost of capital. That is the way the telecom sector globally will continue to be. We have never had exposure to the sector.

How will the second half of this year be different from the first half because a lot has changed in terms of orientation, outlook on inflation, a war, a spike in commodity, central bank’s narrative in terms of fighting inflation as a public enemy number one? All these will start having implications on earnings, demand and outlook. Could the second half be radically different?
Right through the bulk of the post Covid recovery, ally for the Indian stock market was cheap money printed by the western central banks. That is now behind us as is the western central banks are intent upon jacking up the cost of money by at least another 150-200 bps to get a grip on inflation in their countries.

I reckon the main ally for India over the next two, three, four years will be the gradual realisation by foreign investors that Xi Jinping is simply not going to make the China that they thought they were investing in. So this whole notion that the west has cultivated over the last 20 years that China is some great country to invest in, has gradually crumbled. There is still a body of hope in the west that the good old China that they loved and invested six times more money than they invested in India, will come back. Through the winter, that hope will crumble and therefore if we look ahead, the main ally for India will be the reallocation of $3 trillion odd that western investors have pumped into China over the last 20 years.