Expert: Saurabh Mukherjea – Why you must be investing in India | Marcellus Investment Managers

Bryce: [00:00:18] Welcome back to another episode of Equity Mates, or should I say? All right, All right. All right. Welcome to another laid back episode of Equity Mates, folks. 

Alec: [00:00:27] I know who this is.

Bryce: [00:00:30] Okay, good. Now, whether you're just kicking off your investing journey or your cruise in close to Warren Buffett territory, we're here to help you ride these financial waves from your first bar all the way to those sweet, sweet dividends. If you're just tuning in for the first time, Welcome. Welcome to the party, man. My name is Bryce. And as always, I'm joined by my equity buddy Ren. Thoughts on that?

Alec: [00:00:53] So for people new to the podcast, Bryce has been rolling out the same introduction for years, so he now asks ChatGPT to give it to him in different styles as different people. And before we started recording, he and our producer Sascha, were going back and forth because he didn't think people would get this one. But I got it straight away. Matthew McIntyre. 

Bryce: [00:01:15] Yes, nice. Well played. 

Alec: [00:01:15] I think that that might indicate a lack of pop culture. 

Bryce: [00:01:20] All right. Well, producer Sascha, we need to turn it up a notch, Ren. I think that becoming too easy. Nothing too hard for me, though. So we'll see. But good. Well-played, but Ren. Wow. What an interview we are about to jump into. 

Alec: [00:01:32] Yeah, we spoke to Saurabh Mukherjea, who is an Indian investor. He is the founder of Marcellus, which is an Indian investment fund and advisor. Before that, he funded an investment firm in the U.K. Clear Capital. A pretty incredible story. And we cover the story, but then we just cover what's happening in India and it's got me excited about investing in India. 

Bryce: [00:01:59] I know it's not going to give anything away. But his final line, which was this, is a defining moment in investing for the next decade. 

Alec: [00:02:08] We may end up using that as the title of the episode. So you may say that before. 

Bryce: [00:02:13] This gives you a sense of how, how much opportunity Saurabh and I guess many other investors are now saying in India and some of the stories of the companies that are now up and coming there and the economic growth that is occurring in that country is just mind boggling. 

Alec: [00:02:29] Stick around to the final part of the interview. We unpack two specific companies. You know, we've spoken to a number of experts who speak about some of the big Indian companies. HDFC Bank has come up a few times. Reliance Jio has come up a few times this year in, Infosys all, true. Yeah, yeah, yeah. But Saurabh leaves us with two companies that I hadn't heard of before. I'm going to hazard a guess. You hadn't either. But just doing really fascinating things. So it's one of those interviews where it's like we're pretty lucky to be able to speak to these people.

Bryce: [00:03:02] Absolutely. 

Alec: [00:03:03] Look, I think without any further ado, let's get to the interview. Just a quick reminder that while we are licensed, we're not aware of your personal financial circumstances. Any advice you hear is general advice only when we're talking about individual stocks. Make sure you're doing your own research and you're making your own decisions. But with that said, let's get to our interview with Saurabh Mukherjea, the founder and chief investment officer of Marcellus Investment Management.

Bryce: [00:03:30] So, Saurabh, you have founded investment firms in both the UK, which was Clear Capital and India Marcellus. Can you tell us these founding stories? You know, it must have been such a different experience both in the UK and India. Can you help us just sort of paint the picture? 

Saurabh: [00:03:47] So look, the UK Start-Up story, Clear Capital is 2003 and we started the firm. A few of my friends and I got together, one of one of us and it was an asset designer. You, the UK newspaper, called Financial News. I was a management consultant at that time. I was 27 years old trying to figure out how to work in the stock market and starting out in London 2003, middle of the downturn, the post 911 downturn. It was a fairly sedate start and with the next four years clear Capital became more of a successful investment advice advisory firm in the UK. But in a country growing at 2 to 3%, there's only so much excitement you can get. So. So we studied nice time at one level, at offices the next to the River Thames. So at lunchtime you could go to the Oval and watch watch a test match if there was one going on. Work life balance was a thing which existed for me back then. In 2003, four or five, we made a name for ourselves. Five years later, we sold the firm for a modest valuation to a larger bank in the UK, and that's when I migrated to India. I worked in India for ten years for a larger investment bank. I built that brokerage business, that wealth management and that asset management business. 2018 is when we set up set up Marcellus and interestingly was much the same core team with the same core team that I worked in. Green Capital was also setting up Marcellus in 2018. Now, this Start-Up story was a different year. I was 30 years old. I had a little bit of money, but. Our aspiration was to get $200 million of assets. Assets under management. Have a nice, nice work life balance. Go home at 6:00. Enjoy it. Enjoy the evening with the family. But the $100 million aspiration turned into $1,000,000,000 next to no time. I think in three years, less than three years, we had $2 billion under management, largely local money, some of the American and British endowment money and from having to staff. In 2018, we had 120 staff bite by 2021. And in retrospect, I guess that makes sense. Like this The Indian economy is growing at 7% in real terms. The stock market has compound about 13, 14% now for 20 years. There's 20 million investors locally in India. That number is growing by 2 to 3 million each year. So in retrospect, your aspiration to run a business with hundred million dollars of assets under management feels a little quaint. I think that's the reality of Indian system, sort of bubbling cauldron of emotion and intensity. So clear capital was a nice, sedate, enjoyable Start-Up. Marcellus is a far more intense, high adrenalin affair. I've lost most of my head in the last five years, been in this business. 

Alec: [00:06:29] Well, I mean, I've lost most of my hair and I don't have $1,000,000,000 under management, so. But I'd love to know about your investment philosophy both today. But, you know, if you think back to your early days at Clear Capital starting out to now, how it's changed over that journey.

Saurabh: [00:06:46] Part of the change is just my getting older. So most people, most places in the world started by reading Benjamin Graham, Warren Buffett, Peter Lynch. And if you read legendary investors like that, you build a picture of the world looking out for good companies. You want companies with sustainable competitive advantages, but you also build a picture that the valuation is incredibly important to focus on. As I've got older and as I migrated from the UK to India, I realised that just as important in valuation, perhaps even more important than my valuation is, is the integrity of the management team. Right? So, so this is still why this is the fifth largest stock market in the world, India. Is it still a country? But accounting and governance is something that you have to work really hard at. You have to work. A lot of figuring out is the is the are the people running the company on? Are the honest or are they doing naughty things. So the premium and the premium and integrity I place today is far higher than the one I placed 20 years ago. And the second thing I realised was that because of the changes in technology, because of the way the world has changed and the ability of big data of now off of highly intelligent management teams to keep building deeper and deeper moats around technology, you can have companies and indeed India has around a dozen of these companies. You can have companies with compounded 20, 25% for 20, 30, 40 years. And naturally these companies valuations will look eye wateringly high most of the time. And therefore over the last five or six years, my colleagues and I had to have had to rethink much of what we knew about valuation in our days in London.

Bryce: [00:08:25] Now, Saurabh, you've spoken about work life balance and on top of managing over $1,000,000,000, you've also written six books. So where you find the time to do that, I'm not sure. But one of them we thought was most relevant to our audience, and it's one that one of our experts that we've had on the show before has referenced Andrew Brown, which is Coffee Can investing the low risk Road to stupendous Wealth. So what can everyday investors like us learn from this coffee can investing approach? 

Saurabh: [00:08:55] So we got the idea from a gentleman who used to work for capital in Los Angeles. So his name is Rob Kirby. Faster than I think six or seven years ago. But in 1983 or 84, Rob Kirby wrote this famous paper called Coffee Investing. You can Google it. There's Google, Rob Kirby and coffee and investing. I think it's a fabulous full page paper in which Rob explains that when he was managing money in capital in the sixties and seventies, he was managing money behind it with people in Los Angeles. And this lady came to him and said, Rob, I'm really happy client have done a great job with my money. I've lost my husband recently and I want to manage. I want you to manage his portfolio as well. And initially Rob was overjoyed that, you know, look, this lady in her time was in grief. She's starting to need to manage the money that her deceased husband used to manage. But then Rob opened the husband's portfolio, right. As we've turned into sort of panic because he realised the deceased husband had outperformed Rob Kobe by 2 to 1. Right. And the reason the dead man had outperformed the fund manager for capital was Rob realised what the man would do. The gentleman were still able to do what he would buy the same stock Rob Kirby bought. But when Rob Kirby sold, that guy didn't sell. He just sat on those stocks. And by just sitting forever on a bunch of really good companies because Rob Kirby's buying criteria was pretty good. He was buying good company. Rob was exiting those companies prematurely. So the most relevant example, I think, to your audience that he gave was Xerox. So, Rob, Kobe was Xerox in 68, I think 71, there was a Israeli-American war. Oil prices shot up. So Xerox's margins came under pressure because I guess the input into toners is petrochemicals. So Rob was scared about the consequences of that. The Israeli American word for Xerox's margins, Rob, or Xerox in 71 and then through the seventies, as you know. Right. America and the rest of the world photocopying its brains out. And as the word photocopy, this brings out little to cost but jobs and benefit because he had prematurely exited Xerox on this macro scare. Right. And that's what that's why Rob sort of came up with the concept that look much like Americans in the Wild West would come take their family savings, put it in a coffee and shove it underneath the pillow. You said that's the best way to invest. So I read this paper in 2013 and I thought it has enormous relevance for India because as I've seen the same happen in India, I was seeing around a dozen or so Indian companies compounding cash flows at 20-25% when they long periods of time. And I felt that what Indian family should do is buy these dozen or so companies. These are clean, well-run, powerful compounding machines and just sit on them. Right. It doesn't matter whether it happens or the Russia-Ukraine what happens or China blows up or doesn't blow up, sit on a bunch of really high quality companies and you can make a really, really large portfolio. You can build a large portfolio for yourself with minimal trading. So in 2018, my colleagues and I wrote this book that you reference in Bryce called Coffee Investing the Longest Stupendous Wealth. And in a way it was the making of us, it was the making of our careers. The book has been translated into several Indian languages. It is sold on this original sales online, but the pirated versions are available on every bookshop in India across the land.

Alec: [00:12:13] I love that, you know. You know you've made it when your books are getting pirated and distributed online. So we want to turn to investing in India more generally because our audience here at Equity Mates is primarily Australian. And then we have some listeners in the US and the UK. So not a big Indian audience, but we hope to grow it. But you know, the India investment story and the economic story has been hard to miss the past few years, but I'm sure our perception of that story is just filled with misconceptions. So what are some of the most common misconceptions you hear from Western investors when it comes to India? And how should we be thinking about India?

Saurabh: [00:12:55] So when I go to the United States and to the UK to pitch to institutional investors, I did three things which perplexed me a little bit, perplexed me less now than they did five years ago. But even now I get sometimes thrown aback. The first is there's this perception that India is a poor country, and some people call it poor, some poor people call it underdeveloped. That's wrong. It's an incredibly wealthy country. Our estimate is household wealth in India is around $10 trillion. Now, clearly, that is unevenly distributed, right? It's unevenly distributed. We are one of the least equal societies in the world. But because there are 1.5 billion people in this country, you have roughly 100 million people operating at close to first world levels of wealth and wealth and income. And that gives this country enormous impetus, whether it's in consumption or indeed in stock market investing. So if I look at the data, right, last five years every year, the $300 billion of financial assets has come into the Indian financial system from local households. This is households buying life insurance, general insurance, mutual funds, direct stock market investing and so on. So I think the first thing to realise is this is a country with a very high savings rate and it's had a high savings rate for nearly 20, 25 years. So the water wealth in this country is very nice and I think for us Indian audiences, what the IPL I think would be hard for them to understand this because you can see the world's highest display in India. And one of the reasons for that is the people watching the IPL are people with spending power, which is why the advertising revenues coming from the IPL are so big. So that's the first point, is that this is actually quite a wealthy country. In fact, if you look at the Indian stock market other than the United States, other than the American market, no other market in the world has made so much money in the last ten years. The Indian stock market has grown by $2 trillion. It was worth a trillion, trillion and a half a decade ago. It's worth three and a half trillion today. That's also a measure of just how much wealth has been created in India. Quintillion dollars of stock market. But I think the second misconception is that somehow this is a Wild West. It's not in rupee rupee country with dodgy courts and dodgy rules and regs. And I'm not claiming it's a perfect set up. I don't think any democracy, any free market democracy can claim to be like that. That's the sort of nature of free market democracies. You will have ups and downs, but by and large, the. Local legal and regulatory system works. I played my little role in sitting in several regulatory committees, but by and large, compared to, say, markets like China or indeed the United States, this is actually a fairly robust regulatory system with courts which are by and large fit. So whether it's an institutional investor coming in to invest in the Indian stock market, it's a retail investor in Australia or an Australian company making investments on the ground in India, you will get a pretty fair shake. You'll get a fair shake on what is a relatively transparent and well-managed regulatory and legal system. And a third piece that I get a little perplexed by is this point of view on valuations. This is, if you ask me, this is the biggest bugbear I have invested investors. A lot of people expect to see a developing nation to have cheap valuations. But if that developing nation has been growing at 7% real for 20 years, and if well-managed companies are growing their cash flows at 25% for 20 years, you're not going to get them at 2030. Be like, you'll have to pay up for that. And therefore, the quaint notion that I'm entering a developing economy, give me developing economy valuations. It doesn't work. And those are the sort of foreign investors who keep waiting for India to get cheap. I suspect they'll be waiting for many more years for India to get a team. 

Bryce: [00:16:34] With those misconceptions in mind, how should we be thinking about investing in India like you've made it now sound like a pretty tantalising opportunity. So how should we in the Equity Mates community start to think about investing in India? 

Saurabh: [00:16:49] From a practical perspective, I don't think foreign national is going to individually come in. I don't think it's easy for foreign nationals to individual coming. What all foreign nationals can do is invest in India funds. So so there's a whole host of global fund management houses, the Fidelity's in the capital who will have India funds. I'm sure there's a bunch of American ETFs. That's the example that BlackRock runs the largest Indian ETF, iShares line of products in the ETF available, which is the largest ETF coming into India. But the other thing that the Indian government has made relatively easy is it's allowed pension funds on mutual funds on indeed even foreign corporates to come and invest in the Indian market. That whole process of a of a foreign, corporate or a foreign fund or a foreign endowment or family office based in Sydney coming and investing in the Indian market has been made quite straightforward. You basically register with your custodian. Your custodian could be Citigroup or Bank of New York Mellon or Deutsche Bank. You choose your custodian. The custodian sets you up to invest in India, and that's the legal fees done and dusted. In terms of stock selection, I could recommend my books if you want to. So get a primer on how to select stocks in India. And diamonds in the Dust as The Diamonds in the Dust is the book my colleagues and I've written that has been violated widely and it's been translated in Indian languages. The first part of Diamonds in the Dust focuses on accounting fraud and how you can detect which Indian companies are cooking their books. That's roughly 40% of Indian companies you eliminate through the forensic accounting route. And then the second chapter is on. The second piece of the book is on capital allocation. Because this is a country with high growth, you need to look for rational capital allocators. Companies who can deliver a return on capital consistently of 15% or better. And the final piece is dominant franchises much like America between 1880 to 1930. We are going through a bit of a gold rush, a land rush as the smart companies were conquering and the inside industries are doing so quietly. You don't want to go on TV or CNBC and shout out from the rooftops that you're grabbing the commanding heights of the Indian economy. So you have to do a little bit of work to figure out why these companies who are grabbing strategic chunks of the economy, using technology, using smart business processes, and if you join these three pieces together as forensic accounting, capital allocation analysis and looking at the looking at the franchise, looking at the dominance of the franchise, then in the sectors like banking sectors, like the consumer discretionary spending, sectors like pharmaceutical, unable able to identify, I would say 15 to 20 large compounders companies with market caps at $4,050 billion. You can grow your wealth at the Australian dollar terms 16 17% pretty consistently. 

Alec: [00:19:37] Love that. Very exciting. When we were emailing before this interview, you mentioned that there are some good books and some good movies to understand. India, obviously a couple of your books that you've mentioned topped that list, but are there any other ones that we should be adding to our list to go on? Well, watch or read? 

Saurabh: [00:19:57] So let me start with the movies, because I suspect movies are perhaps a more enjoyable way to get London to India. So if you want to sort of relatively, what should I say, a sedate start to learning about India, start with I can because Gandhi, I think, was made in 1982. It won lots of Oscars in 1982. And then about the but not Gandhi, the man we call the father of the nation. So. So I think this is Richard Attenborough. Richard Attenborough as the British director and Gandhi is a kind of seminal movie which explains the foundation of India. Then if you want to pick up the pace and come to some modern day India relatively quickly, there are two movies. It's a fast one, and part of it is called Gangs of Wasseypur, Gangs of Wasseypur. Extremely exciting movies on how the Mafia functions in India. This is basically article into The Godfather one. Godfather two, unfortunately, partly wasn't made by Gangs of Wasseypur, one in part to a lot of fine anybody who has quit and ideas about, you know, India being the land of mystics and yoga and meditation, I think they'll be in for a rude shock and they watch the Gangs of Wasseypur. This is a full on, high intensity, growing economy. And and then if you want to sort of develop your knowledge in India using books, I would say read the hype of India. A million mutinies now the snipers India, a million mutinies now written in 1989. But I think the best book ever written on the country feels like it was written yesterday morning. It captures the desperation and the sheer spirit and bunch of the people really, really oblivious. Naipaul The million mutinies Now then you can move on to language has lost India after Gandhi. That's more about the development of the politics and how democracy developed in India. And for a more irreverent, irreverent look at India, read. James Crabtree. James Cameron was the former FDA correspondent in India. That James Craft was billionaire Raj. That's a more irreverent look at some of the richest and most powerful people in the country. But I think you as Australians, you are the commentary from there. The Titans like Rupert Murdoch on hand, I don't think would be surprised that any of this and all of this can give you a pretty, pretty realistic picture of what's happening in this vast economy. 

Alec: [00:22:12] Well, I've just been quickly Googling and opening new tabs as you spoke there. So a few movies and a few books to add to the writing list. So looking forward to getting into that. We want to turn to some of I guess, some stories about particular Indian companies or some things that you've spoken about in terms of the macro environment, stuff like that. I guess we can't go past the Adani story to start things off because I think for a lot of Australian investors that's probably what they think of first when they think of investing in India in 2023. So we obviously watched it from the outside looking in to tell us what it was like in the country at the time and sort of what are you seeing now and where to from here for Adani. 

Saurabh: [00:22:56] Let me start by noting the fact that the Indian Supreme Court has opened an investigation into it and the Indian securities regulator is due to present to the highest court in the land in the next few days about what they're what the securities regulators investigation is ending. More often than not, I've seen the Supreme Court deliver and deliver justice. So I remain optimistic that they do the right thing here. But if I look at the most obvious aspect of this and I'm bring this out because I think this is important, this is the company that you mentioned. It wasn't as if Indian domestic institutions were loaded up on the stock. It was foreign investors increasingly who were the heaviest investors in this name. And even today, even after everything that's happened in the last six, seven months, look at all that, even today, it's foreign investors who are loading up on the stock. And I find that extremely interesting. What it suggests to me is that the local regime in India is pretty tight and tough, both in terms of disclosure and in the way the Indian securities regulator deals with the market. The fault line, the Achilles heel, I think, of the Indian market and perhaps many other markets. These are these money laundering havens to which money comes into markets like India. And I'll tell you why. It's the fault line. If a market like India. Right, is still not a developed world market, if India today takes a very hard line stance on money from offshore tax havens coming into India, then the Western media and Western investors turn against India and say, look, these guys are putting up laws against capital inflows. This is not right. This is not WTO, This is not how the Washington consensus should be playing out. So if India takes a hard line and blocks money coming in from offshore tax havens, that doesn't play well with the global capitalist audience. And on the other hand, if India keeps its borders sort of open, if India keeps its markets open to money coming in from less than ideal jurisdictions, then this becomes the fault line for the Indian market that that countries with no disclosure to. The city offered a base to which you can come into the Indian market, and that gives you will to do lots of lots of very, very naughty things. Now, if you read my book Diamonds in the Dust, my colleagues and I have laid out ten case studies of accounting naughtiness in that the first 200 pages of ten case studies. And you'll notice in many of those case studies, example clocks and things you notice in that case study that the bulk of the naughtiness gets done in offshore tax havens, and then that ripples into the Indian stock market. I think this is a fault line for the Indian market. I don't have I don't think there's an easy answer for the regulator. The regulator clamps down on this, then foreign inflows get jammed, the markets reputation suffers, the regulator keeps these open. Then you have to have room to do naughtiness in the Indian market. So it'll be interesting to see how does this piece plays out. But on the broader issue, everybody in India is keenly looking forward to see what the Supreme Court has to say on the subject. 

Bryce: [00:25:51] Now, we recently read an interview that you did with The Economic Times, where you mentioned China's troubles could be a good thing for India. I think the quote was along the lines of the macro narrative is probably the best that we have ever had. Wow. But each claim, huge claim. So I guess the question is, well, can you actually help us unpack your thinking here?

Saurabh: [00:26:14] I'll give you the firstly, the superficial way to read that comment superficially is we are at the top of our rate hike cycle, America's height by five and a half percent. Indian central bank has hiked by two and a half percent. And even though we are at the top of the rate hike cycle, economic growth is running at six and a half percent. The stock market is close to all time highs. Corporate balance sheets are in the healthiest shape I've seen them in the last 20 years. The banking systems balance sheet is in good shape. So many are close to the top of the rate hike cycle and you're doing well on your macro metrics. That's always very encouraging. But there's a sort of deeper point I've been trying to make in India. If I look at India's challenge over the last 20 years, right, it's fundamentally been around China. Absolutely. Hammering the Indian manufacturing community. Right. Is simply historically been impossible for Indian manufacturers to deliver. Chinese manufacture. The Chinese manufacture the cost of capital of three or 4%, because that was the rate at which the Chinese government owned banks would lend. And much as I would like to see cost of capital fall in India, I refuse to find it believable that a developing economies like China or India can have cost of capital of 24%. So the blow up in the Chinese banking system, the blow up of the Chinese banking system, I think has rendered that construct unviable, the sort of trillions of dollars of cheap capital that the Chinese banks gave to Chinese companies would then undercut Indian manufacturers, I think is now out of the picture. And that's the first thing to consider. A whole generation of Indian manufacturing has been wiped out. I'm seeing that revival in the last three or four years. It's very, very interesting. Companies that were created in 1975 in India almost died by 2015. And in the last four or five years, the reviving again, as the China, as the Chinese amount of Chinese products, the longer the price competitive these are with the Indian product side that's quite remarkable. For the first time in the last 20 years, Chinese products are no longer price competitive with many of their Indian counterparts. The second challenge India has historically had is our infrastructure was weak compared to China. China put a lot of money into infrastructure, lots of highways, lots of superfast trains. We haven't invested as much. It now turns out many of China's infrastructure projects seem to be white elephants and the banks that funded the in trouble. In contrast, in the last decade or so, India has almost tripled its highway network and doubled its airline network, rail and broadband connectivity to ATX. So our infrastructure isn't perfect. It's not I would say it's not in Japanese or European standards yet, but our infrastructure is materially, tangibly better. And it was a decade ago. Trucks are moving at prices twice the speed that they used to move at ten years ago. Working capital cycles of dental crunching and laggard status and infrastructure I think has remediated considerably. The third piece was dumping, even as I look around the room, right, many of the things in my view itself are Chinese made, including the laptop to which I'm talking to you historically, because of the way China dealt with the WTO regime, it was very difficult to stop dumping off of of Chinese technology products the range of Chinese manufactures in the last three or four years. I think not just India and many other countries, the United States included, have taken a harder line stance on dumping. And therefore, as the incidence of dumping reduces, we are seeing we're seeing local manufactured companies coming to the fore. For example, Apple has decided that a quarter of the iPhone production and iPad production will move to India. I think Apple makes do $20 billion of iPhones, iPads, a quarter of that. Moving to India is a big deal. So that's what I meant by by the fact that events in China and the way China's playing out. Finally is allowing India Indian manufacturing specifically to find its place in the world. 

Alec: [00:30:02] Just some of those stats that you were talking about there, tripling your highway network 80 times the broadband penetration, four times the flight penetration or whatever the numbers were. It must just be fascinating to be living in a country where like development is happening that quickly. So Bryce took a gap year in India back in 2011, 2010. 

Bryce: [00:30:26] 2010. Yeah. 

Alec: [00:30:27] So a bit more than a decade on from when Bryce was there, like how much would have changed in a decade? Like give us a sense of just how quickly things are changing over that. 

Saurabh: [00:30:37] So let's, let's take the example of airport site. Every single airport, every single airport that I use for my film, I travel around India. Every single airport is less than 12 years old. 

Alec: [00:30:52] So every airport in the country, Bryce wouldn't have any of them because it. 

Saurabh: [00:30:57] Would have into the older version. They would have into the older version of the airport. And by the way, the result of that is because these are all modern airports. Their ability to handle traffic is at a different level. To say what I see when I go to America. Going to America is actually really painful now because the airline experience, the experience of travelling America around America or indeed the experience of using London Heathrow is quite shocking or shambolic to many Indians. Now compared to what you see in airports in India. Right? The second the second thing that you notice is almost nobody in India, in the cities uses cash anymore. So I hardly ever go to the ATM. So whether I was paying the local three wheeler to. So we travel around in three wheelers for short hops. I bet that guy he will not. If I offered in cash, she will think something was wrong with me. The guy selling coffee on the streets, tea and coffee on the street outside. He will not take the all pay each other using our phones. So we've got something called UPI Unified payment interface. So Rice came to India. Rice will go out looking for a cup of coffee. Rice will scan using his phone, using the camera on his phone. He was scan into the scan into the coffee Landau's bank account say 25 US cents. And that's how money is paid, right? So 51% of GDP goes. It is about transacted using UPI, which is phone to phone transactions. 

Bryce: [00:32:21] That was a major push from the government, wasn't it, to try and get everyone to start actually using digital payments because so many people were using cash that the lost revenue from a tax point of view was so significant that they didn't they fought, forced the currency so that like the minimum note size was so large that the smaller sort of change became obsolete and forcing people into digital.

Saurabh: [00:32:48] Absolutely. So I think it's been a it's been a carrot and stick sort of carrot that the government has held out for the entire country. And it's taken 12 years to build this platform, to build the platform. Every Indian has an app to get a bank account, a unique ID, the bank account, the unique ID have had to be mapped onto 1.5 billion people's phones. And so the massive infrastructure built out. So but alongside that, the carrot that the government held out was if you guys do this, it becomes far easier for you to do tax compliance. So when we allow income taxes each year, now a lot of it is just auto filling because all our data set example, whatever I'm transacting in the stockmarket, my, my unique ID is being locked into that. So the taxman knows even before I filed what I've made in the stock market, what the capital gains of that are. Similarly, every time I buy a cup of coffee because my phone is locked into my unique ID, the government knows that I've bought a cup of coffee, so does my bank. Right. So the positive side, the banking system and the government is saying is if we can monitor you and track you will give you credit at much lower rate. So the biggest surge in credit in India, the biggest side in bank lending is unsecured finance to small vendors selling juice and burgers and driving around in trailer rickshaws. The small semi owner is getting credit at a rate that he couldn't have dreamt of when he came to India 11 years ago. You could argue that there is a curtailment of civil rights because Big Brother is watching you. Every transaction is now inside this whole net off of of big data. But but that's I think that's the way I guess the country developed states saw indirect tax system also locks into this the indirect tax system is also locked into this whole digital web, the banking system, indirect tax system, and an entire big data interface locks into it. And that's how the this country has has, I would say, leapfrogged many other emerging markets by a couple of couple of generations by making a jump from a almost to a country with 14% of GDP. Being cash. Cash transactions of 14% of GDP have gone to 51% of GDP in cashless transactions.

Alec: [00:35:02] Well, Saurabh, we're going to take a quick break to hear from our sponsors here. But on the other side, I want to unpack a couple of individual companies that are in your portfolio that Bryce and I and the equity rights community haven't heard of before. Welcome back to Equity Mates. We're speaking with Saurabh Mukherjea, the founder and chief investment officer of Marcellus Investment Managers. Saurabh, we've unpacked the story of India and it is just such a fascinating story. But in the final part of the interview, we really wanted to turn to individual companies. We've spoken to a number of experts on the podcast over the years who have mentioned Indian companies, but it's largely the bigger Indian companies. HDFC Bank has come up a few times, Reliance Jio. But we want to ask you, what are some of those lesser known Indian companies that may or may not be in your portfolio, but that you think are really interesting and that you think in the coming years? Bryce, myself and the rest of the Equity Mates community will start becoming more and more aware of. 

Saurabh: [00:36:24] So let me take sort of two completely sort of polar opposites in terms of market cap and quick disclaimer. I'm invested in these companies through our Marcellus products. So my parents who live in the UK and saw our 10,000 lines. So that disclaimer here is two companies that I think are going to be very interesting to watch. So we are already the pharmaceutical capital of the world and that one into one into drugs that are consumed in America, one and two tablets are consumed in America is made in India. But we are not yet the active pharmaceutical ingredient capital of the world that's that onerous to the last of China. China makes 80% of the world's APIs. India only makes around ten 15%. But I think that's going to change. I think very quickly you'll see in the next five, six years a big chunk of API production, active pharmaceutical ingredient production will shift to India because I think American companies will do strategic reasons will shift their dependence from China to India. And as that happens, Indian API manufacturers will need more ceramic glass reactors. So pharmaceuticals and APIs are made in ceramic glass reactors. And a company called GMM Pfaudler. Pfaudler is a German name, P-F-A-U-D-L-E-R. GMM Pfaudler makes 55% of the world's ceramic glass reactors. They make 80% of India ceramic glass reactor. These are sort of giant coffee mugs in which in which pharmaceuticals I'm boiled and turned into medicines. So this is a world leader. This has been a world leader 110 years. Five years ago, when we first bought the company, it was just the India leader. They were owned by a German company. As we looked up the financials, we could see that the Indian company was making more money than the German company. So we suggested to the owner he might want to buy the German company. So this made the suggestion. In 2019, 2020, COVID came along and at the height of COVID, the Indian company acquired the German company. And thus from being a subsidiary of a German world leader, the Indian company itself has become a world leader, and this is quite a big deal. Pharmaceutical glass reactors are critical for the well-being of the pharma plant. Nobody goes in to experiments with cheap Chinese glass reactors. You want the best in the world because otherwise you'll get shut down, you know, hairline crack in a glass reactor with undoubtedly a pharma plant. And therefore, I expect this company's dominance to grow. Plus the fact that India itself will become the API hub of the world will, I think, reinforce the dominance of GMM Pfaudler profits have been compounding at 50% for five years and I don't see any reason for it to start because it's the essential product. So that says this is $1,000,000,000 market cap company. Let's go to the other extreme. Let's look at a $50 billion market cap company, which I think is basically a tech company of a smart tech company masquerading as the Nbfc Nbfc new non-bank financial company. Basically, I think you might call shadow lenders in Australia. These are large lenders, but they don't have a banking license. So this company is called Bajaj Finance. My erstwhile neighbour is the CEO and I watched them for 15 years. What I realised they do very cleverly is they have built huge repositories of data on 140 million Indians. You have one 1.5 billion strong population, but roughly 140 million Indians account for the bulk of the country's wealth and economic activity. What by those finances done is built in enormous amounts of big data on these 40 million Indians. Right? What do they do in the morning? When are they working? How much are they spending? What socioeconomic strata they belong to, what address delivered, etc., etc., etc. And they've used that to build an extremely profitable lending machine. The lending machine compounds at 25, 26% return on equity is around that same number. Even though the company is geared only five X like most lenders, most places in the World Bank year ten X, that equity would be ten X. Bajaj Finance operates at half the gearing and yet has twice the return of equity priced return on equity than any other large lender anywhere in the world. When you look at Jp morgan's numbers or you come to India and look at, say, State Bank of India's numbers, you see Bajaj Finance is inordinately profitable and the secret is mining. Very expeditiously not to do this. They hired the most number of electrical engineers and computer scientists in India every year. They are the largest sales force deployment in the world. This is the only company in the world that sales force has a dedicated server, dedicated sales. Salesforce calls it My God scale. Why have 3 million Indians every aspect of their lives monitored on that salesforce? And this is used to do high velocity landing. So. So for dentists, doctors, self-employed professionals, even people like me, if I walk in to see an Apple store here. Even before I have told Apple I want a loan on the iPhone, they would either systems would detect that sort of has come to the store that sort of is a high quality borrower. And by the time I have expressed interest in the phone, their systems would also be an interest free loan on that iPhone. So they've turned this into an app called the Bajaj one, two, three app. So to say, right, if you come to India again, if you open the app, see on Saturday morning at 1130 that Apple know exactly what you want to see on Saturday morning at 1130 they will have studied your behaviour. And so Saturday morning, 1130 show your cruiser bike that apple their technology would have told them that roughly 1 million of our 130 million users would want to cruiser bike they would have gone to the cruiser by company, negotiated about poaching rate and given at price the best possible price in the cruiser bike available in the Indian market with 0% financing. And this combination of basically bringing in Amazon type construct but also a big data construct that see a Google might have you to bring in Google's analytical strength with Amazon's retail capabilities all into one app, I think is going to be very, very powerful in this country. You remember we just discussed how tech savvy India has become.

Bryce: [00:42:25] Wow. That's Afterpay on another level. 

Alec: [00:42:30] Yeah. That's that's pretty incredible. Like, you often think about companies, you know, like the Chinese tech story was a lot of Chinese tech companies just mirroring what American tech companies had already done. But what you just explained, there is not something that I'd ever really heard of before. 

Bryce: [00:42:45] Yeah. Is this tech something that they're like, Are other nationals looking at this? 

Saurabh: [00:42:50] I think you're hearing that other countries want to implement UPI. I think UPI is, is, is a game to this is amazing. Now, the reason UPI is hard for other countries to implement, as explained, right? You have to operate on a national scale to get every single citizen to have a unique ID, then map that unique ID to their bank account and then map the bank account onto the phone. It's a triangulation of three very critical things. Other countries want to do it, but it's taken India ten years and you can imagine that there is a pretty punchy discourse here around civil liberties, information sharing and so on, so forth. So when I, you know, over the weekend, perhaps a couple of glasses of something nice to drink, I sometimes worry about these points. But hey, Monday to Friday when I'm investing in my colleagues and I try to figure out how to make more money from this construct, which is quite remarkable.

Alec: [00:43:43] Yeah, I guess the other thing is just the sheer logistics of having a population of 1.5 billion, all with phones and all with Internet access would be like just a massive undertaking. And yeah, like I'm just trying to even just get my head around that. Like that would have taken years, I imagine. 

Saurabh: [00:44:02] And so so I think we're not done yet. So only 50% of the Indian population has smartphones, right? So one of our largest telecom company is going to roll out in the next couple of months, a $10 smartphone, a $10 smartphone, which means the number of smartphone users is could double in the next 12 months. And already, even with just 50% of the population having smartphones, we use more mobile data than any other continent in the world. So when this $10 smartphone hits the market in a couple of months, we'll sort of have a smart data and load explosion. And I think that will further, further increase the reach of companies like Bajaj Finance, because the more data footprints, more Indians generate, the more that data can be used to lend to them, to offer them. So this is. 

Bryce: [00:44:50] Crazy. Yeah, well, we have unfortunately reached the end of our interview, Saurabh, but thank you so much. It's been absolutely fascinating and I'm already looking forward to having you on again because there's a lot to unpack when it comes to India. And every time we do speak to experts, you know, we I guess we improve our understanding but are also introduced to many opportunities that we just don't come across in our regular sort of rating of investing material. So thank you so much for your time. Before we do go, though, every year we hold the Equity Mates Awards and one of the awards is the expert of the year and it's a chance for our community to to just vote on who they feel is one expert that has come on the show and has really contributed to their investing. Journey. And by nature of being on this episode, you are automatically entered into the award. I think what is a piece of investing advice or a content recommendation or just a final thought that you would like to pass on to our audience who are, you know, really curious and on the journey of learning to become better investors. 

Saurabh: [00:45:55] I mean, we've tried to make everything that we write basically free on super low costs. So Marcellus.in, our website, we give all our newsletters, all our webinars away for free, and we put stuff every weekend up there. So if you want to stay in touch about India, just go to Marcellus.in and all the newsletters blogs are for free. Leaving Marcellus aside. Leaving Marcellus aside. The most useful portal for gathering information on the Indian stock market I've found is a site called Money Control. Money Control is part of a large industrial conglomerate in India, but it's a genuinely useful site they've got up to date news on corporate results, share stock prices, articles and so on. And if you want to do your own screening on Indian stocks are free screening services offered by screener.in, it's a company called Screener. So you can put up any number of Indian companies keen on fundamentals, keen on valuation because of the tech savvy nature of Indian society. There's plenty of digital resources available at zero cost. Make the most of it and make the most of what I think would be the defining opportunity in investing for the next decade or so. 

Bryce: [00:47:04] Well, that's the quote of the episode. 

Alec: [00:47:05] Yeah, I think so, yeah. 

Bryce: [00:47:07] A defining opportunity of investing for the next decade. Love that. Well, we will make sure we include some links to all of those resources in our show notes. But Saurabh, thank you so much. It's been an absolute pleasure. We thoroughly enjoyed it. 

Saurabh: [00:47:19] Thank you. Thanks, guys. Thanks to all.