Saurabh Mukherjea’s Marcellus ends love affair with Relaxo Footwears after calling its chappals wealth creators

Some market experts call the reversal a courageous call that saves investors from underperformance

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“This chappal is an instrument of enormous wealth creation,” says Saurah Mukherjea, displaying Rs 103 chappals in his hand in a video of presentation posted on Youtube. “This chappal is a monopoly.”

The chappal (known as a flip-flop in the West) in question was made by Relaxo Footwears, shares of which were owned by Mukherjea’s funds. Marcellus Investment Managers, the portfolio management services (PMS) provider founded by the star fund manager, said it has exited Relaxo Footwears a year after that video was posted.

“Our recent channel checks raised market share loss concerns for Relaxo in two major categories — open footwear (specifically the ethylene-vinyl acetate (EVA) and polyurethane segments) and sports shoes,” said Marcellus in its latest newsletter, dated January 18.

Mukherjea and the funds promoted by him are known for holding stocks over the long term. A firm believer in buying dominant businesses that churn free cash year after year, Mukherjea has held on to some multibaggers despite facing massive drawdowns in stock prices. A good example is Asian Paints, which, Mukherjea says he continues to accumulate.

The move comes after Mukherjea had gone to great lengths to promote Relaxo. He is known to be very vocal about stocks he owns.

It is not clear if the sell call on Relaxo shows a change in his overall investment strategy or qualifies as an investment mistake. An email sent to Mukherjea did not elicit any response.

There was a mixed response from some of the market experts Moneycontrol spoke to. Some scorned the call, while others said investment mistakes can and do happen and it takes courage to cut a position that has gone wrong after you have glorified the stock. “But for the funds’ investors, the outcome is better than suffering underperformance because you cannot go against what you have said in the past,” said the market expert.

In the newsletter, Marcellus suggested that the monopoly, which according to Mukherjea was purely business process and tech driven, was crumbling in the face of threats on two fronts. “On one hand, the price differential gave smaller players an opportunity to take up the bottom end of the market by offering cheaper footwear by using low-quality material,” Marcellus said. “And on the other hand, organised players like VKC took the mid and higher end of Relaxo’s market by keeping their prices competitive. While raw material prices have since corrected and Relaxo has passed on the same to consumers, it will be an uphill task for Relaxo to recover the space ceded to competitors,” the newsletter said.

The money manager added that in the sports shoes segment, players such as Campus are taking market share with a focus on the design element, which is emerging as a key driver of customer buying preferences. While Relaxo has also been stepping up its focus on designs, its uptake in the shoe market has so far been slow, it added.

Relaxo was part of Marcellus’ Rising Giants PMS portfolio. Shares of Relaxo Footwears traded down by 1.5 percent at Rs 874 on January 19. The stock has bled money in recent periods. It is down 10 percent in the last six months and 34 percent over the last year.

The footwear industry, like many others that use crude oil-based raw materials, was on tenterhooks following the sharp rise in oil prices last year, which hit margins. However, crude oil prices have softened since and that should provide some relief.

“Whilst the correction in commodity prices should help Relaxo claw back its margins, the events of the past year have resulted in us reducing the firm’s longevity scores and free cash flow growth forecasts,” said Marcellus.

“When these reduced estimates are fed into our position sizing framework, the result is an exit for this long standing Marcellus holding from the Rising Giants portfolio,” the money manager concluded.

Meanwhile, the Rising Giants PMS portfolio has a new addition in Tata Elxsi. The company provides designing and product engineering services to the transportation, broadcasting & media, and healthcare industries, among others.

Marcellus believes design is its core strength, The Tata brand, strong research and development (R&D) capabilities, and development of adjacencies in sub-segments work in its favour.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.