Saurabh Mukherjea on why he avoids PSU stocks, a few sectoral themes

Saurabh Mukherjea, the Founder and Chief Investment Officer at Marcellus Investment Managers, says he avoids three kind of companies: the ones with naughty accounting practices; the ones that require high government sign offs; and the ones where capex requirements are high but returns are uncertain.  In an interview to Business Today TV, Mukherjea, whose Marcellus has 18 forensic accountants, said there are around 200 companies out of the BSE500, where his forensic accounting research team suggests promoters are pilfering money from the books.

Among sectors, Mukherjea said he avoids companies and sectors where there is requirement of very high governmental sign offs. He gave example of setting up of a five-star hotel in any major city in India, which he says requires 60 layers of governmental sign offs. Mukherjea said such high sign off requirements --- whether it is in the case of metals & mining, real estate, power or infrastructure sector, tend to deplete a company's ability to generate high profits.

Mukherjea said he also avoids companies that struggle to make money due to high capital requirements and see delays in payments due to government-related customers such as the PSU pack. "There is nothing wrong with PSUs. A lot of PSUs tend to make very high capex investments but their returns are uncertain, typically don't fructify. Often PSUs also struggle to get paid by arm of the government get struggle to collect money.

Mukherjea said the first thing he considers in any investment is the clean accounting. He said there are about 300 BSE500 companies where accounts are believable.

"Over and about the clean account, we want to see a track record of the company generating a minimum pre-tax return on capital of 15 per cent. If the pre-tax ROC is 15 per cent, post tax should be 12-13 per cent. That suggests that the company can make money for itself. If it can make money for itself, one can assume that it can also make money for shareholders," Mukherjea said.

Mukherjea said if one applies this criteria, he is left with 50 companies from the BSE500. The third criteria that he applies in picking stocks is that the company should have sectoral dominance and pricing power. This, in addition to the two criteria of good accounts and high ROCE, leaves Mukherjea with 15-odd investing stocks.

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