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Rakshit Ranjan, Investment Management at Marcellus Investment Managers, says “from a long-term perspective, we have seen initial signs of China plus one story playing out in several sectors. It is certainly playing out in the chemical space. Inventory challenges are coming towards the end of the cycle. Maybe over the next few quarters, we would be able to see more normal like for like growth rates, that are representative of what these companies are capable of delivering in the long term. Then we have to go stock specific. When manufacturing moves more and more to the chemicals industry in India, all of the companies will benefit. So, be a little selective as well.”

In your Rising Giants portfolio, you have added a ball bearings company. Now I want to understand this category first. There are very few large bearings companies in India and in this entire manufacturing renaissance which the country is looking towards triggered by the government. Nudged by the government, Indian companies are doing some fabulous work. How do you see the role of the technologically advanced bearings sector in the economy?
Rakshit Ranjan: We have added one ball bearings company and there is engineering skill required in this kind of a business which is difficult to replicate easily. It is a value-added part of product offering in the engineering and manufacturing space, and I think an investor can find a stickiness of competitive advantage here. The rest of the party is trying to figure out that as private capex in India picks up, whether the demand factors will also rise. Once we are convinced about supply factors, I think over the next couple of years, as private capex picks up, there are opportunities for stocks like these.

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I also see that you have increased your exposure towards a pipe company and this is the plastic pipes or the water pipes mainly, but this entire space of pipes, this is getting a very big boost, not only because of the construction industry, the real estate space, but also because of Jal se Nal initiative of the government. How do you see the prospects of pipe companies?
Rakshit Ranjan: You One is the competitive aspect and the other is the macro demand aspect. So on the macro demand side, pipes are not so much of a recurring renovation, home building material article. It is more for a new home building or a very large renovation project where you actually fix the plumbing as well of the house, if it is a pipe related to the house. So when it comes to the macros, the way the real estate demand has picked up in the last 12 months, it is certainly supportive for home building material in general and for products like these.

But there is a very specific competitive aspect here. There is one other large competitor, one of the largest players in this industry, where we understand that after a player was sold to an MNC five years ago, over the last year or so, there have been some weakening of the grip that the firm had at the channel. Hence, there are opportunities for market share gains.

So there are two companies – one of which we have owned in our portfolios – which are leading the market share gain from this other large competitor who is losing the market share. There is a lot of opportunity that we are trying to grab here in terms of the competitive space. Yes, there will be new players entering all the time because the returns on capital employed are high here and in any industry that would attract competition. But for any new player, the competitive advantages will be incredibly difficult to build overnight, because on the one hand, you need the product quality to be good and product quality is not just the pipe quality, it is also the fitting quality. On the other hand, you need the influencer to connect where the plumbers, the contractors across the country should be aware of and convinced about why they should keep and sell your products. And then the channel connect.It is at multiple layers that a new competitor, new entrant will have to work on. But what we are trying to benefit from is one of the existing players possibly losing some market share and we are trying to gain from it.

There is another very interesting stock in your portfolio. It was originally a cement sheets company, roofing solutions at best. Now they are expanding and they have cladding solutions, ceiling solutions, pre-engineered fab. Which side of the business of this company do you see gaining traction going forward or is there a transformation happening there? You have added it recently in your Little Champs portfolio.

Rakshit Ranjan: Yes, this is a company specific turnaround where the same company was under stressed financials a few years ago. It has had a change in a few layers of the management team over the last few years and the solution that you rightly mentioned is more for commercial real estate. So there will be offices, there will be hotels where these kinds of solutions go in. This is not so much for residential real estate, but it reduces the construction time as well as the renovation time.

So the utility of using these boards is very high for both the owner of the real estate as well as the contractor in turning around the project at a fast pace. So the demand for this category is rising, replacing the sort of standard walls that you had in all of these commercial spaces and this company is amongst the biggest beneficiaries of that demand. But it is more a company specific turnaround that we have seen happen in the last few years that we are trying to benefit from.

What about some of the chemical names? You have studied chemical space as a team for a very long time. It has gone through very difficult times because of Chinese dumping and market share loss and delays in export. Are we nearing a bottom and would the stocks with higher margin profile, more complex product profile, start moving when the Chinese dumping ends. What are your thoughts there?
Rakshit Ranjan: Yes, until 12 months ago, the chemicals space was doing well. Over the last 12 months, there have been several challenges related to supply chains globally, where there was inventory destocking and price movements, so on and so forth. What we see is that from a long term perspective, the China plus one story that we have seen play out in several sectors, at least there are initial signs. We see that certainly playing out in the chemical space here.

We also see the inventory challenges coming towards the end of the cycle. Maybe over the next few quarters, we would be able to see more normal like for like growth rates that are representative of what these companies are capable of delivering in the long term. Then we have to go stock specific. When manufacturing moves more and more to the chemicals industry in India, all of the companies will benefit. So, be a little selective as well.

But yes, the bulk of the pain is out of the way that we experienced in the last 12 months. That is how we see it.

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