SUMMARY OF ‘THE UNUSUAL BILLIONAIRES’ BY SAURABH MUKHERJEA – Fintelligence

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Reading Time: 10 minutes


This book is a story about seven companies in India which became extremely successful in their respective industries having created enormous wealth for their shareholders over the past two decades or more. The author basically talks about three critical areas that they excelled at:

  1. Focusing on their core business
  2. Deepening their competitive moats
  3. Efficient capital allocation

He mentions how firms can build and sustain their competitive moats using Innovation, Branding, Architecture and Strategic Assets (also known as the IBAS framework). The IBAS framework was originally explained by John Kay, in his 1993 classic, ‘Foundations of Corporate Success’. It is explained as:

  1. Innovation – As John Kay puts it, ‘Innovation is an obvious source of distinctive capability, but it is less often sustainable unless it is patented or where there is process secrecy or other characteristics which makes it difficult for other firms to follow’. In other cases, unless innovation becomes a process which the firm lives day in and day out, it will be difficult to sustain it. It can include product or process innovation, innovation in how the firm operates, etc.
  2. Brands and reputation – Stephen King once said, ‘A product can be quickly outdated but a successful brand is timeless. Brands once built are a very powerful source for competitive advantage. Customers use the strength of the company’s reputation as a proxy for the quality of the product or the service’.  Hence, brands can be a powerful source of competitive advantage for a firm.
  3. Architecture – The firm’s architecture is a network of formal and informal contracts and relationships that it has with its employees, suppliers and customers.
  4. Strategic Assets – Strategic assets can come in different forms, all of which result in a lower cost per unit of production for the firm relative to its competitors. It can include intellectual property, licenses and regulatory permissions, access to natural resources, natural monopolies, etc.

Now, lets dive into each of the companies and understand how they managed to stand the test of time and emerge as Industry leaders.

ASIAN PAINTS

  1. Focusing on Core Business – The promoters (Choksis, Danis and Vakils) have refrained from pushing the company towards major unrelated diversification which could have compromised their management bandwidth. They stuck to what they knew best – Paints.
  2. Deepening its Competitive advantage (Moat) through:
    • Innovation
      • After noticing the gaps in consumer demand, Champaklal Choksi introduced new products where there was no competition. E.g. Washable distemper in cities.
      • They foresaw that with rising labour cost, the customer will be willing to pay for labour involvement only if there will be a service-oriented value addition attached to it. Hence, the company has forayed in service-oriented model in the past decade. E.g. Colour idea stores, Home solutions painting, colour consultancy services etc.
    • Branding – Creating a strong brand recall through consistent focus on advertising. Its advertising campaigns have always kept pace with the changing profile of its customers. E.g. Royal Play, a premium emulsion captures the emergence of nuclear families working in cities with long working hours with tag lines such as “He’s working late? Watch your home’s makeover transform his mood”.
    • Architecture
      • The company has been obsessed about hiring the best people. Champaklal Choksey started the tradition of hiring top management talent from the IIMs in 1969. This practice has continued till date.
      • Asian Paints has a genuinely independent board. The board members get very seriously involved in the appointment of the CEO and all the senior management personnel.
      • They have deep rooted relationships with dealers which have been built over decades. Jalag Dani, a co-promoter of the company once told, ‘Dealers are part of our family. If we find they are affected due to unforeseen events such as riots, floods, earthquakes, etc., we ensure that the best support is provided to them in every possible manner, including extending the credit period, so as to help them get back on their feet’.
    • Strategic Assets – Asian Paints has one of the largest numbers of manufacturing plants and depots across the country which helps it to operate at the highest ratio of revenue per depot and revenue per plant thereby improving inventory turnover and working capital turnover for the overall business. This helps them to reduce the cost of production as compared to its peers.
  3. Capital Allocation – The company’s capital allocation decisions have been focused majorly on its core business. Cash generated has been re-invested in the business and used for expansion purposes and also backward integration.
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BERGER PAINTS

  1. Focusing on Core Business – As said by the Chairman- Kuldip Singh Dhingra, ‘Paints are the only business I know and I know how competitve it is. Hence I have maintained a philiosophy of not taking the risk of allocating towards any business which is not related to the paints industry’.
  2. Deepening its Competitive advantage (Moat) through:
    • Innovation –
      • Introducing new products with special characteristics like Luxol Silk, Breathe Easy, Easy Clean etc.
      • Introducing tinting machines for dealers which did away with the necessity of stocking large number of SKUs.
    • Branding – The company has aggressively raised its advertisement expenditure over the years (from 3% of sales in FY05 to 6.6% in FY15), the highest among its competitors.
    • Architecture – Learning from its competitor Asian Paints, it has developed deep relationships with its employees and dealers. They provide their employees with high freedom with full accountability. Kurien once told, ‘In the consumer industry, there are only two things that make a company successful-its customer and its people’.
    • Strategic Assets – All-India network of plants, manufacturing facilities and distribution network proves to be a key strategic asset which serves as a strong entry barrier in the industry.
  3. Capital Allocation – It could consistently clock superior ROCEs due to:
    • Allocating capital only to businesses in the paint industry without diluting the firms focus on the core domestic decorative business.
    • Sustained focus on technology to improve cost efficiencies.

MARICO

  1. Focusing on core business – Marico’s success has been mainly due to its focus on oil, its core product, first parachute hair oil and then Saffola edible oil. As Saugata Gupta, MD and CEO, puts it, ‘We like to be boringly consistent’.
  2. Deepening its Competitive advantage (Moat) through:
    • Innovation
      • Packaging Innovation – Replacing bulky tin containers with plastic container. The savings generated from low cost plastic packaging were invested in advertising to gain market share. Within fifteen years, 100% of the market changed to plastic packaging.
      • Product Innovation – Marico follows the concept of strategic funding where around 10% of its annual profits are invested in pursuing product innovation. Seeing Indian’s preferences towards savoury snacks, it introduced Masala oats which went on to become the market leader in that category with an annual sale of more than Rs. 100 crores.
    • Branding – The company’s leadership in both Parachute and Saffola over the past several decades is backed by significant investments in advertising. As on FY15, Parachute had a market share of 55% in the coconut oil market and Saffola had a market share of 58% and 65% in premium edible oils and flavoured oats market, respectively.
    • Architecture
      • Work culture – Open office for management, no attendance registers for employees and performance-based remuneration are some of the instances highlighting Marico’s employee friendly work culture.
      • In 2014, Mariwala stepped down as MD and relinquished the post to a professional – Saugata Gupta, a rare move among Indian promoters
      • Marico pushed dealers to achieve stretched targets and rewarded them with foreign vacations. The first FMCG company to do that at that time.
  3. Capital Allocation – Core businesses of most FMCG companies do not need incremental capital to grow due to their highly cash generative nature and low capex requirements. Since Marico’s acquisition had mixed successes, it started distributing its excess cash back to the shareholders by increasing the dividends, instead of pursuing new ventures.

PAGE INDUSTRIES

  1. Focusing on core business – Single minded focus on Jockey as the only brand has ensured that the company doesn’t compromise on its quality of its products. This has been a significant driver of their consistent performance over the last two decades.
  2. Deepening its Competitive advantage (Moat) through:
    • Innovation – Page has been ahead of its competition in terms of its pace of new launches. It has a R&D team whose sole focus is to identify local consumer preferences and introduce new styles regularly.
    • Branding – Page has beaten its competitors in terms of advertisement spend.
      • Introducing in-store marketing of innerwear products where the product would have exclusive display fixtures and bold in-store advertisements so that the consumers can interact with the product directly.
      • Consistent use of Caucasian models in its advertisements to establish a brand recall as an international brand.
    • Architecture
      • Page’s strong relations with its labour force gives it a huge competitive advantage. It spends a lot of efforts in training them. There are also a number of welfare officers in their factories whose job is to make sure that workers are not unhappy about their working conditions.
      • Its employee friendly work culture can also be seen from Sunder Genomal saying that, ‘Our managers understand that its not about having power but about how you empower your subordinates and bring the best results from your team members. Hence, we have a team where each member behaves like a leader. This gives us a winning culture.
    • Strategic Assets – The license agreement with Jockey ensures that Page has access to Jockeys’ innovations in the US which it then brings to India. This is a very strong moat that it possesses.
  3. Capital Allocation – Page’s philosophy on capital allocation is best explained by Pius Thomas – ‘At Page, we are very careful about our capital allocation and will not invest in projects which are not directly related to the core business. Even core projects will not be taken up unless they promise a ROCE of at least 20 percent’.

AXIS BANK

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Deepening its Competitive advantage (Moat) through:

  • Branding – It let go of the UTI brand and created its own identity. Today, Axis Bank is amongst the top private lenders in the company with a strong brand name.
  • Architecture
    • In the year 2000, it introduced ESOPs and gave substantial salary hikes to its employees to align their salaries with industry standards, despite resistance from the board. Also, employee policies are very consistent at Axis Bank with little subjectivity involved in pay hikes and bonuses.
    • The strength of the independent directors was witnessed when P. Jayendra Nayak was replaced by another professional – Shikha Sharma in 2009. The fact that the board thought and acted differently from the chairman showed its superior level of autonomy.
  • Strategic Assets – The branch and ATM networks are the key strategic assets of any bank. In this front, Axis Bank fared well with its industry leaders – HDFC Bank and ICICI Bank.

HDFC BANK

  1. Deepening its Competitive advantage (Moat) through:
    • Innovation
      • It converted the payment system of stock exchanges and its members from manual into real-time electronic processing system which reduced the capital requirement of various players in the supply chain,
      • It was the first bank in the country to launch a) Core Banking technology platform. b) Mobile banking.
    • Branding – Hasmukhbhai Parekh, the then MD of HDFC ltd. was not comfortable with lending HDFC’s name for the bank and suggested the name – ‘Bombay Bank’ instead. Later, Mr. Aditya Puri convinced Mr. Parekh for the same and the bank was named as – HDFC Bank. This brand made a big difference to the bank at that time. However, over the years, HDFC Bank has emerged as a strong brand in its own right. In fact, it is now a bigger brand than its original promoter – HDFC Ltd.
    • Architecture – HDFC Bank is well known for its systems and procedures. Everything they do is a part of their S&P.
    • Strategic Assets – Its key strategic asset has been its low-cost funding franchise which helped improve and sustain its net interest margins and effectively compete with its peers. It has done so by providing steady customer service using technology which in turn has helped the bank to maintain a high CASA (low cost funding).
  2. Capital Allocation – When the bank was growing rapidly in the high-yield retail loans over 2003-13, it used to buy back only a fraction of the loans it originated from HDFC ltd to meet its ‘Priority Sector Lending’ requirements because the ROE of loans originating from the latter were lower than as compared to other products that the bank was selling. However, when the yields of its retail loans started falling post FY13 it started to buy 70% of the loans it originated from HDFC ltd. This helped the bank to maintain its high ROE. This high ROE also ensured access to fresh equity capital at high book multiples which in turn helped the bank to maintain a dividend pay-out ratio of 20-25% while still maintaining a healthy balance sheet growth.
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ASTRAL POLY

  1. Deepening its Competitive advantage (Moat) through:
    • Innovation – Astral started off with an innovative product – CPVC and since then it has consistently launched new products at regular intervals through partnerships with global players. Astral was also the first company in India to launch silent piping systems, foam-core pipes and composite pipes.
    • Branding – During the period of FY07-12, its branding expenditure expanded at a CAGR of 48%. It was the first company to advertise on public buses and autorickshaws. A major brand building exercise that it undertook was at Wankhede Stadium in November 2013 when Sachin Tendulkar played his last test match before retiring. In 2014, the company signed Bollywood actor Salman Khan as its brand ambassador.
    • Architecture 
      • Over the years, Astral has built its ties with the plumber community. Sandeep Engineer, the promoter of the company said, ‘The plumber is also my customer. I give him utmost importance’.
      • The promoter has two sons and neither of them is on the board which is in contrast to the practice traditionally followed by Indian promoters. Instead both of them regularly visit the plants and work with distributors during new launches.
    • Strategic assets
      • It has four manufacturing plants in India – two in Gujarat, one each in Himachal Pradesh and Tamil Nadu. Its pan-India manufacturing facilities, well entrenched network of distributors and reputation with plumbers provide a strong entry barrier against any new player who wants to sell CPVC pipes in India.
      • Most pipe manufacturers in India have their presence only in agriculture except Astral which has presence in agriculture, plumbing and industries.
  2. Capital Allocation – Its excellent capital allocation can be witnessed by the fact that its sales grew at a CAGR of 44% during FY05-15 without any major strain on its balance sheet as it refrained from burdening its balance sheet with expensive acquisitions in unrelated businesses and instead reinvested the profits back into the business for growth and expansion.

In the final part of the book the author – 1) Provides us with a checklist to identify businesses which can become great and create enormous wealth for their shareholders. 2) And explains why should investors not churn their portfolio often.

FINAL CHECKLIST FOR INVESTORS

  1. Industry Attractiveness
    • Is the company’s business heavily dependent on government regulation?
    • How strong is the competitive intensity of the industry?
    • What is the overall size of the industry and its growth potential?
    • Is the company in an industry where the value addition is high?
    • Is it a capital intensity industry?
    • Is the industry cyclical?
    • Does the business generate excess returns for the shareholders?
  2. Management quality
    • Does the management have a track record of good governance and clean accounting?
    • Do the owners of the company have connections to political parties?
    • Does the company have a strong track record of efficient capital allocation?
    • Do the promoters have a track record of remaining focused on their core operations?
  3. Competitive advantage
    • What’s the company’s track record on innovation?
    • What is the company’s investment in brand and reputation?
    • How strong is the company’s architecture?
    • Does the company own any strategic assets?
    • Does the company have ROCEs that are higher than the industry average?

WHY SHOULD INVESTORS AVOID FREQUENT CHURNING OF PORTFOLIO?

  • Higher probability of profits over the long term
  • Benefits of compounding over the long term
  • Neutralizing the negatives of short-term noise in the market
  • Reduced transaction costs which help in increasing the overall returns in the long term
  • Finally, back-testing results have proved that rebalancing of the portfolio does not improve returns.
About the author Saurabh Mukherjea is the Founder and Chief Investment Officer of Marcellus Investment Managers., a SEBI approved Portfolio Management Service. He is the former CEO of Ambit Capital and played a key role in Ambit’s rise as a broker and a wealth manager. Saurabh was educated at the London School of Economics where he earned a BSc in Economics (with First Class Honours) and MSc in Economics (with distinction in Macro & Microeconomics).   Source: https://marcellus.in/team/saurabh-mukherjea-cfa/



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Amey Chheda
Amey is a Chartered Accountant, an Equity Investor, and a Blogger.
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