Saurabh Mukherjea's The Unusual Billionaires looks at Indian companies that have built lasting value, including Marico, Page Industries, Axis Bank, and HDFC Bank. Below are the main ideas, each with a practical takeaway.
What counts as a great company?
The book says there's no standard definition. A great company attracts top talent, earns respect in the business world, and usually trades at a premium. Share price is one measure, but Mukherjea sets two concrete tests:
Non-financial companies: 10% revenue growth and 15% ROCE (return on capital employed) every year.
Financial companies: 15% loan book growth and 15% ROE every year.
Takeaway: Set success metrics that fit your industry, and check yourself against them regularly.
Persistence and the IBAS framework
The book opens its argument with a line from Robert Half: persistence makes the impossible possible, the possible likely, and the likely definite. It then uses John Kay's IBAS framework: innovation, brands and reputation, architecture, and strategic assets.
Takeaway: Treat setbacks as part of the work, and use IBAS to check where your company is strong.
Marico: focus
Marico's chairman, Harsh Mariwala, believes focus leads to depth and depth leads to excellence. The company has stuck to three things: keeping brand leadership, extending winning brands, and selling off low-margin ones. Its CEO, Saugata Gupta, describes the approach as being "boringly consistent." In coconut oil, a simple product, Marico has held more than 50% market share for over two decades.
Takeaway: Find what you do best and put your resources there.
Marico: culture
Mariwala sees culture as a competitive advantage that can't be copied, because it helps everyone execute the same strategy. The book lists how Marico builds it:
Openness: When it moved into its new office after incorporating in 1990, top managers had no cabins, which was a first for an Indian company. People used first names.
Empowerment: No attendance registers, and leave isn't monitored.
Integrity: Employees approve their own expense claims up to a set limit.
Meritocracy: A significant part of variable pay depends on individual performance, not just the company's.
Marico's former CFO, Milind Sarwate, says hierarchy there rested on the criticality of the role and the person's potential, not on age or seniority. Director B.S. Nagesh says the culture produces owner-managers, which helped Marico counter threats from Wilmar and HUL.
Takeaway: Culture only helps if it shows up in daily practices like these.
Marico vs. HUL
The then HUL chairman, Dadiseth, told Mariwala to sell Marico to HUL or face dire consequences. Mariwala chose to fight. Markets doubted Marico, and its price-to-earnings ratio fell to as low as 7x, from 13x at its 1996 listing.
Marico moved all its attention to Parachute, its core product, and gave the effort a war theme. It was called "Operation Parachute ki Kasam," and at one business conference people dressed as soldiers. Marico relaunched Parachute with new packaging and a tagline stressing purity, widened its distribution, and started an internal sales force initiative. Within twelve months Parachute had won back its lost share. HUL's rival brand, Nihar, never caught up, and HUL eventually dropped it from its power brand list and sold it to Marico in 2006.
Takeaway: When a rival threatens your core product, concentrate everything on defending it and get the whole team behind it.
Page Industries
Page's products rest on high quality, customer loyalty, and frequent innovation. To sustain that, it needs a well-trained workforce with high retention, which is why it manufactures in-house. Its leader, Sunder Genomal, says managers there focus on empowering their teams, so each member acts like a leader.
Takeaway: If quality is your edge, invest in the people and the in-house capability that produce it.
Axis Bank
The book credits Axis with three things: a strong brand that Indian savers trust (first UTI, then Axis), the largest ATM network and one of the largest branch networks among private banks, and steady innovation in how it segments and serves customers.
Takeaway: Build trust, be easy to reach, and keep finding new ways to serve different customer groups.
HDFC Bank
HDFC Bank's results, the book says, come from a risk-aware culture that aims for healthy returns without high risk, an internal architecture that lets it rethink core processes (cash management and low-cost deposits are examples), and the strength of the HDFC brand.
Takeaway: Simplicity and risk awareness can matter more than size.
Long-term investing
Mukherjea argues that holding a portfolio for ten years or more lets compounding work. Over time the winners dominate the portfolio and the losers fade to insignificance. Long holding periods also cut out short-term noise and reduce transaction costs, since there's little buying and selling.
Takeaway: This is the book's argument about its own investing approach, not a guarantee of returns. Weigh it against your own situation.
The checklist
Mukherjea's checklist starts with industry attractiveness:
Does the business depend heavily on government regulation?
How many competitors are there, and how intense is the competition?
How large is the industry, and how much can it grow?
Companies in high-growth industries tend to have better prospects than those in mature ones. Mature industries can still grow by moving up the value chain, such as telecoms going from voice to data, or carmakers going from hatchbacks to sedans.
The book also draws on Kay's view that lasting competitive advantage comes from distinctive capabilities or strategic assets. Strategic assets include patents, licences, and natural monopolies. Distinctive capabilities are intangible relationships with customers, suppliers, or employees that rivals can't copy: brands and reputation, architecture, and innovation.
Conclusion
The book's companies share a few habits: they know what they're good at, build a culture that backs it up, and keep investing in brand, innovation, and relationships for the long haul.
Favourite Quotes:
Paradoxically, the question, ‘What is a great company?’ is harder to answer. A great company attracts the best talent, commands respect in the business community and, more often than not, trades at a premium in the stock market.
However, there is no standard definition of greatness. After all, if the stock market is rational, the share price is the best possible measure of the value of the company. And higher the value, greater the company.
Return on Capital Employed (ROCE) is defined as ‘earnings before interest and tax/capital employed’ where capital employed is defined as the fixed assets used by the business, e.g. plant and machinery plus the working capital being used to finance the business.
Criteria for measuring great companies:
(a) Revenue growth of 10 per cent and ROCE of 15 per cent every year for non-financial services companies; or (b) loan book growth of 15 per cent and ROE of 15 per cent every year for financial services companies.
‘Persistence is what makes the impossible possible, the possible likely, and the likely definite.’ –Robert Half
Four criteria of John Kay’s IBAS framework are namely innovation, brands and reputation, architecture, and strategic assets.
‘I strongly feel that focus will lead to depth and depth will lead to excellence.’ —Harsh Mariwala
‘The reason for success of companies like HDFC Bank, ITC and Marico is due to the focus and consistency that they bring to their business,’ said B.S. Nagesh, independent director on the board of Marico in my meeting with him in December 2015.
Since the firm’s incorporation, Marico has consistently focused on three key factors which drive a consumer staples company’s growth rates: (i) maintaining brand leadership; (ii) extending winning brands; and (iii) divesting low-margin brands.
Dadiseth, the then chairman of HUL, had warned Mariwala to sell Marico to HUL or face dire consequences. Mariwala decided to take on the challenge.
Even the capital markets believed that Marico stood no chance against the might of HUL which resulted in Marico’s price-to-earnings ratio dipping to as low as 7x, as against 13x during its listing in 1996.
As Milind Sarwate, former CFO of Marico, recalls, ‘Marico’s response was typically entrepreneurial and desi. We quickly realized that we have our key resource engine under threat. So, we re-prioritized and focused entirely on Parachute. We gave the project a war flavour.
For example, the business conference on this issue saw Mariconians dressed as soldiers. The project was called operation Parachute ki Kasam. The leadership galvanized the whole team. It was exhilarating as the team realized the gravity of the situation and sprang into action.
We were able to recover lost ground and turn the tables, so much so that eventually Marico acquired the aggressor brand, Nihar.’
Marico retaliated by relaunching Parachute: (a) with a new packaging; (b) with a new tag line highlighting its purity (Shuddhata ki Seal—or the seal of purity); (c) by widening its distribution; and (d) by launching an internal sales force initiative.
Within twelve months, Parachute regained its lost share, thus limiting HUL’s growth. Despite several relaunches, Nihar failed against Parachute. Eventually, HUL dropped the brand Nihar off its power brand list before selling it off to Marico in 2006.
As Mariwala said ‘I strongly believe that culture can be a source of competitive advantage in an organization and it is impossible to copy. The organization’s culture is a major driving force in the execution of strategy.
Correct culture helps in proper execution of strategy by helping everyone align on the same page.’
Specific measures that Marico emphasized on in this culture include: Openness: When Marico moved into its new office after its incorporation in 1990, in a first for an Indian company, an open office was created where the top management didn’t sit in cabins.
First names were used to reinforce informality.
Empowerment of responsibility: There are no attendance registers (or musters as they are commonly known in factories) to be signed for daily attendance, and employee leave is not monitored;
Integrity: In order to reinforce integrity, employees authorize their own expense claims up to a preset limit, instead of authorization from seniors;
Meritocracy: A significant portion of an employee’s variable remuneration is based on the individual’s performance rather than on the company’s overall performance. This helps stress the concept of meritocracy.
Milind Sarwate, former CFO of Marico, told us, ‘When I came to Marico, I quickly sensed that it had an environment different from my earlier organization, Godrej Consumer.
In Marico, hierarchy was based, not on age or seniority, but on the criticality of the role and the potential and effectiveness of the individual.’
B.S. Nagesh, the former MD of Shoppers Stop and an independent director on Marico’s board, said ‘How do you transfer ownership to a management team without making them owners? This is one of the keys to success.
Otherwise, one owner cannot be the Brahma, Vishnu and Mahesh (the holy trinity of Hindu gods). Because of Marico’s culture of empowerment, I see more owner-managers than just managers. This has enabled them to counter threats from Wilmar and HUL.’
Page Industries: Jockeying from Manila to Bengaluru
‘Nothing contributes so much to tranquillize the mind as a steady purpose—a point on which the soul may fix its intellectual eye.’
—Mary Wollstonecraft Shelley, nineteenth-century English novelist
‘Our managers understand that it’s not about having power but about how you empower your subordinates and bring about 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,’ said Sunder Genomal.
Page’s products are driven by high product quality, customer loyalty and frequent product innovation. To sustain all of this, Page has no choice but to rely on a well-trained workforce with high retention rates and, hence, an in-house manufacturing process.
Axis Bank: Confounding the Sceptics Repeatedly
‘Adventure is the life of commerce, but caution is the life of banking.’ —Walter Bagehot, founder of The Economist and author of Lombard Street: A Description of the Money Market
At the heart of this outstanding performance there have been (a) a strong brand—initially the UTI brand and then over the past decade, the Axis brand—that Indian customers, especially savers, trust;
(b) the largest ATM network and one of the largest branch networks in the private sector; and (c) consistent innovation over time in segmenting and tackling groups of customers in novel ways.
HDFC Bank: The Power of Textbook Execution
‘Any intelligent fool can make things bigger and more complex. It takes a touch of genius—and a lot of courage—to move in the opposite direction.’ —Albert Einstein
‘Simplicity is the ultimate sophistication.’ —Leonardo da Vinci
At the heart of this outstanding performance there have been (a) a risk-aware culture that has focused on generating healthy returns without taking high risks;
(b) an internal architecture that has consistently allowed the bank to innovatively rethink the core process flows that characterize the central offerings of the banking sector in areas like cash management and low-cost deposits; and (c) the strength of the iconic HDFC brand.
‘We love to be boringly consistent.’—Saugata Gupta, MD and CEO, Marico. Despite being in the business of selling a simple product such as coconut oil, Marico has been able to retain its market leadership with more than 50 per cent market share over the last two decades
‘It is the task of leadership to create and nurture an environment in which a multitude of talented minds work in harmony so that mutual competence is reinforcing rather than debilitating.’—Champaklal Choksey (2 August 1997).
The checklist
-Industry attractiveness
1. Is the company’s business heavily dependent on government regulation?
2. How many competitors are present in the industry and how strong is the competitive intensity?
3. What is the overall size of the industry and its growth potential?
Companies in high-growth industries tend to have better prospects than those in mature industries.
Even in mature industries, growth potential exists in the form of moving up the value chain—for example, from voice to data in telecoms, from standard definition to high definition in Direct-to-Home broadcasting, from hatchbacks to sedans in cars, etc.
The world’s most famous prize for manufacturing excellence—the Deming Prize—is named after the American statistician, professor and author, W. Edwards Deming who said, ‘Learning is not compulsory . . . neither is survival.’
In his 1993 book, Foundations of Corporate Success , Kay states that ‘sustainable competitive advantage is what helps a firm ensure that the value that it adds cannot be competed away by its rivals’.
He goes on to state that sustainable competitive advantages can come from two sources: distinctive capabilities or strategic assets.
Whilst strategic assets can be in the form of intellectual property (patents and proprietary know-how), legal rights (licences and concessions) or a natural monopoly, the distinctive capabilities are more intangible in nature.
Distinctive capabilities, says Kay, are those relationships that a firm has with its customers, suppliers or employees, which cannot be replicated by other competing firms and which allow the firm to generate more value additions than its competitors.
He further divides distinctive capabilities into three categories:
-Brands and reputation
-Architecture
-Innovation.
To sum up, to get ahead—and remain consistently ahead—of competition, companies should continuously invest in innovation, brands and building strong architecture around its stakeholders.
Holding a portfolio of stock for periods as long as ten years or more allows the power of compounding to play out its magic in a rather unusual way.
Over the longer term, the portfolio comes to be dominated by the winning stocks whilst losing stocks keep declining to eventually become inconsequential.
Thus, the positive contribution of the winners disproportionately outweighs the negative contribution of losers to eventually help the portfolio compound handsomely.
Investing and holding for the long term is the most effective way of killing the ‘noise’ that interferes with the investment process.
By holding a portfolio of stocks for over ten years, a fund manager resists the temptation to buy/sell in the short term. With no churn, this approach reduces transaction costs, adding to the overall portfolio performance over the long term.
The P/E ratio is a very popular valuation method to measure and compare stocks versus their earnings. The ratio is a number arrived at by dividing a company’s current stock price (P) and its earnings per share (E—which could be trailing or forecasted earnings).
A high P/E indicates, among other things, higher earnings growth potential. Industry P/E ratios are calculated by dividing the total market capitalization of all the companies in an industry with the total of their earnings.
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