Saurabh Mukherjea’s investment strategy: ‘Continue to avoid investing in PSUs, added Infosys, holding TCS’

Saurabh Mukherjea, Founder, Marcellus Investment Managers on Monday explained in a television interview on why he continues to avoid PSU stocks and expects the bull run to continue in 2023. 

Mukherjea has the “Coffee Can investing strategy” where one invests money in fundamentally strong companies and holds them for several years, thus increasing the chance of making multibagger returns.

In an interview with ET Now, Mukherjea explained why he has historically avoided PSU stocks and made a strong case for investing in IT stocks.

“There are two reasons why we’ve historically avoided PSUs and continue to avoid them. One is there’s a fundamental conflict of interest in the PSUs’ construct. PSUs are owned by the government of India and therefore, quite rightly prioritise the interest of the nation over the interest of the shareholders. For example, defence PSUs, they are owned by the government to protect the nation and not owned by the government to deliver returns to Marcellus’ clients.

“The second aspect is that if you look at the fundamentals of PSUs, whether you take an SBI or a BHEL or a Coal India, the return on capital tends to be significantly lower than the cost of capital over an extended period of time, which means the value creation engine is missing. One can get wrapped up in P/E multiples and P/B multiples and buy these things but basic financial analysis tells you that if a business lacks the value creation engine it’s difficult to put my clients’ money at work and expect any returns. They might come through from time to time but that’s speculation rather than investing,” said Mukherjea.

He said he finds it amusing when brokerages downgrade IT stocks. 

“I get very amused when I see brokers rate IT as Underweight/Underperform. That’s like saying take a short position in steam engines at the heart of the Industrial Revolution. Everything around us that we’re seeing, especially in the Western world, will have to automate further and will have to go to Cloud even more. TCS and Infosys are the sources who take the West into the world of automation and Cloud. We continue to hold TCS and have added Infosys,” he said. 

Mukherjea also said he wants to see clarity from ITC on how it wants to deploy its cash. 

Marcellus had exited ITC in 2020 and added HDFC Life. Continue to believe in ITC’s competitive advantage.

“Expect only 11% to 13% growth in ITC’s earnings over next 5 years. Rs 37,000 crores cash with ITC can increase the earnings growth through acquisitions. Don’t want to count on the same due to unpredictability,” the PMS fund had then said.

“ITC’s dominance in cigarette is unquestionable but unless they use the fruits of that dominance which is this enormous pile of free cash flow unless they use that constructively for shareholders it is difficult for us to see where the long term compounding engine lies there,” Mukherjea said in the TV interview.

He also said that he thinks 2023 will continue to bring good economic news, more foreign money and domestic flows. “So, I would not be surprised if the all time high story sustains right through the next 12 months,” Mukherjea added.