So, all you have to do is identify sectors which are seeing rapid “formalisation” (the technical term for the hammering of the black economy) and invest in the most efficiently managed company in the sector. As the black economy shrinks, Marcellus’ clients are getting rich courtesy our investments in Asian Paints and Berger Paints (the most efficient paint manufacturers), Astral Poly (the most efficient CPVC pipe manufacturer), Pidilite (the most efficient adhesives and waterproofing manufacturer) and Titan (the most efficient jeweller).
3. Benefit from the demise of China’s manufacturing prowess
During the 30-year period between 1985-2015 China was unstoppable. Chinese companies conquered sector after sector and laid to waste whole sectors of the Indian economy such as the manufacturing of Active Pharmaceutical Ingredients (APIs), Specialty Chemicals, synthetic textiles (and thus apparel), various types of plastics, footwear, electronics, etc. And then for reasons we don’t fully understand, around 2015 the Chinese juggernaut stopped and year-by-year the situation in China – economically and politically – has deteriorated.
China’s troubles seem deep rooted. Firstly, they seem to have built too many apartments, offices, etc., and as a result the Chinese real estate developers seem to be in financial trouble courtesy the excess unsold inventory on their balance sheets. Secondly, the Chinese public appears to be revolting against paying monthly instalments for flats which are supposed to be built (but are not being built because the developer has run out of money.
Thirdly, the combination of the previous two points means that the banking system is stricken with bad debt, with NPAs rocketing to such levels that analysts now express NPAs as a % of GDP! Fourthly, Xi Jinping continues to hammer the Chinese economy with lockdowns precipitated by his zero-Covid policy.
As China slides, knowledge intensive light industrial and specialty chemical manufacturers in India are finding that the local (Indian) and global market has opened up for them. Quoting from our Little Champs newsletter dated 28th July 2022—The Evolutions Underpinning the Revolution:
“Little Champs portfolio companies’ dominant position in their niche markets forms the key basis for their superior pricing power, profitability and RoCE vs. peers. However, a key pitfall of ‘niche focus’ is a high probability of hitting a growth ceiling after reaching a dominant position in a niche industry – a concern often raised for Little Champs and more generally for B2B companies. Little Champs are successfully mitigating these growth concerns through their globalisation strategy—nearly 50% of the non-Financial Little Champs companies now derive more than 25% of their revenues from outside India. More importantly, these global forays are based on product innovations, process improvements and people management – these are more enduring moats than competitive pricing. Besides providing a significant growth runway, globalisation gives the Little Champs learnings which further enhance their domestic market dominance. The globalisation strategy has been an important pillar of expanding the addressable market and adding new growth drivers to many of the Little Champs’ business. For more details on the globalisation strategy see the July 2021 Little Champs newsletter.”