What's On Your Mind, Mr. Buffett ? 2017

Moats of India

They might lose a battle, but they won't lose the war. What makes them unbeatable?

Published 7 years ago on Jun 14, 2017 4 minutes Read
Picture courtesy: Rajasthan Amantran

Asian Paints is India’s largest decorative paints company with a 65% market share in the segment compared with 15% for its closest competitor Kansai Nerolac, reflecting its unassailable position. The 75-year-old company’s moat is its strong relationship with distributors and a powerful brand association nurtured over decades.

Kotak Mahindra Bank has all the trappings that define a high quality bank – a strong management, durable fee business, and pristine asset quality owing to a well-defined loan-book construct. It’s a trusted consumer brand with all financial product offerings.

HDFC Bank has an impeccable record of consistent growth in earnings – 25% over the past 10 years – while maintaining its asset quality. Its retail loans constitute more than 50% of its total book, and even within its wholesale loans it has maintained a low proportion of corporate advances, which has time and again been a source of stress for Indian banks. Low cost deposits (current and savings accounts) account for 48% which is the highest in the industry.

If a mechanic were to ask a car owner the make of his four-wheeler battery, without even checking, 99% would say it’s Exide. That’s the recall it has. Automotive batteries in India is a duopoly and Exide’s moat is being tested by rival Amara Raja, which has caught up faster in the replacement market

With a portfolio comprising power brands such as Good Day, Tiger, Marie Gold, 50-50 and Milk Bikis, Britannia dominates the biscuits market with over 35% share. Britannia’s earnings power was unleashed after the new CEO beefed up distribution and frontline sales force which doubled ROCE from 40% in FY13 to 80% by FY17.

GAIL is the country’s largest state-owned natural gas processing and distribution company; its moat is its pipeline network of 11,000 km

Eicher Motors is known for its cult motorcycle brand — Royal Enfield Bullet. Eicher sells 600,000 bikes a year with a realisation 4x that of other commuter bike companies such as Hero, Honda and Bajaj. Can it be dislodged? Boys love the rev and power of the Bullet. There is a certain pride attached to owning the brand — you become a part of a cult community. It’s aspirational. 

Its super brand Fevicol has a strong “bond” with the trader community. Carpenters have used the brand for years and know exactly how it works, how much time it takes to layer, to dry and so forth. And since this is usually a small part of the overall cost, customers would not like to take a chance and experiment. Fevicol with a 70% market share is now generic for adhesives in India.

Its Jockey brand of innerwear has a significant pull, which along with its strong distribution presence creates a wide moat. Its asset-light model makes its economics compelling.

The flagship consumer products company of the 119-year-old Godrej group is deepening its moat with dominant market share in niche, emerging product segments.  It lords over the home insecticide market (50% share) with its Good Knight and HIT brands, besides owning the highest selling crème colour brand Godrej Expert Rich Crème, which constitutes 13% of revenue and two major soap brands Godrej No.1 and Cinthol. A recent addition is the premium salon hair care brand, BBlunt.

It owns powerful brands such as Parachute, Saffola, Hair & Care, Nihar and a couple of other niche brands. Parachute is synonymous for coconut oil and enjoys supreme pricing power — Marico has almost always been able to pass on any input spike to consumers.

Indraprastha Gas and Mahanagar Gas are the country’s leading city gas distributors with the sole supplying rights in Delhi and Mumbai, respectively. Mahanagar’s pipeline infrastructure is a significant moat as it is irreplicable.

Balkrishna Industries primarily exports tyres; its speciality is off-highway tyres. The tyres, unlike regular car and truck tyres, require short-duration production runs. As the company has been focusing on this segment for many years, it has a huge library of moulds that gives it a unique advantage ensuring customers don’t look elsewhere.

Another great moat in the domestic tyre industry is Chennai-based MRF. It’s the kind of company Buffett would absolutely love — great brand of car tyres built over several years around rally sports, a low profile family-owned enterprise that never approached the market to raise funds beyond the initial public offer. The company’s equity continues to remain static at Rs.6 crore, and has averaged a ROCE of 24 per cent over 10 years.

Avenue Supermarts runs a one-stop supermarket chain, D-Mart that offers customers a wide range of basic home and personal care products and groceries with up to a 10% discount on the MRP. Its properties are owned, which is a distinct advantage. Avenue Supermarts’ strategy of buying its inventory with cash upfront gets it best discounts, which it passes on to customers. That’s how it has been building customer loyalty. Through its careful store expansion strategy, it has grown sales four-fold over five years to Rs.8,600 crore, doubling ROCE from 11% to 24%. So far in India, retailers have only bled due to the unreasonably high cost of real estate and unbridled expansion. As its chain grows, the economies of scale will be more pronounced for the country’s most profitable retailer.