The art of the sustainable advantage

goes on to specify the parameters of this definition and looks at companies with over ~100-crore market capitalisation that achieved revenue growth of over 10 per cent annually and return on capital employed of more than 15 per cent for a period of 10 years. The universe of companies meeting these criteria is only 18. On these, Mr Mukherjea’s team from Ambit Capital applied the “coffee can portfolio” filter, or price performance over 10-year periods. This logical exercise leaves him with eight companies of which seven are studied in the book, Asian Paints, Berger Paints, Axis Bank, HDFC Bank, Marico, Page Industries and Astral Poly.

With its deep-dive into hard data, historical analysis and defined parameters for study, the book provides an excellent overview of the key strategies that ensured their success. For each company, Mr Mukherjea first touches upon its background, then looks at the “secret sauce’ it deployed, its “competitive moats” and its capital allocation. For several of the companies, the “secret sauce” was laser-like focus on the core business. So, for example, Asian Paints leveraged supply-chain efficiencies and brand power for success in a ruthlessly competitive market. It also introduced the small tins of paint that made it a hit with those who like to paint the horns of their bulls or their front doors during festival time. The other paints company in the book, Berger Paints, additionally deployed a wide product range with stand-out products such as Luxol Silk, and undertook highly effective marketing.

A competitive moat is the big differentiator for sustained success. Mr Mukherjea analyses this by deploying John Kay’s IBAS framework, which is detailed in an appendix. Essentially, it identifies the key drivers of innovation, brands and reputation, architecture, and strategic assets. Innovation is where Marico stands out, developing its Parachute brand of coconut oil in the round plastic bottles to emerge as market leader. It then had to mount a “war” under “Operation Parachute ki Kasam” to take on rival Hindustan Unilever’s aggressive marketing of new coconut oil products. With innovative packaging, branding, and wider distribution network, Marico was able to first regain lost market share, and eventually buy out the HUL “Nihar” brand. Of such market battles are fascinating corporate stories made.

Page Industries, which produces the Jockey brand of innerwear in India for the global company, pulls ahead of competitors due to the high quality of its product and constant innovation. Under the architecture section, Mr Mukherjea delineates its strong labour relations and good personnel management, a three-tier distribution network, and a relentless process-oriented approach. Astral Poly Technik is an unlikely addition to the book, but Mr Mukherjea points to its brand-building through public advertisements, unusual for a CPVC pipe manufacturing company. The firm also signed on Salman Khan as brand ambassador and sped ahead of the nearest competitor.

The inclusion of two banks in the book is somewhat unexpected as financial services companies are quite different from manufacturing firms. In fact, these were the only ones that met Mr Mukherjea’s “coffee-can” portfolio criteria of consistent returns, surviving the economic slowdown of the last three years. Axis Bank’s architecture under the IBAS framework includes a strong and professional board of directors and motivation of all employees. The “strategic assets” for HDFC Bank are defined as its low-cost funding franchise and high-quality financial technology.

A common feature in the section on capital allocation for the manufacturing firms is a conservative focus on core business and products for the long term. Each company reinvested its profits in funding expansion and to make its main products better, and was able to maintain a high return on capital employed with brief fluctuations.

In a chapter on the chief common characteristics of “greatness”, the author recapitulates the themes of sustainable focus on core business, deploying the IBAS framework for competitive advantage, and sensible allocation of capital. Finally, Mr Mukherjea brings it all together to instruct readers on what makes good investments. “Investment in stocks is a tough, rigorous and complex process,” he points out. As a professional equity analyst, his check-list under the categories of industry attractiveness, management quality, and competitive advantage can prove to be immensely useful for the lay retail investor who merely follows the market. The key message is to be present over the long haul in stocks that meet certain parameters, such as benign regulatory environment, good corporate governance, and so on.

This fascinating and well-researched book offers new knowledge on what makes excellent companies. As for me, I now know which company to go to for my next house overhaul and which brand of coconut oil to slather on for my next head massage. Saurabh Mukherjea Penguin Portfolio 445 pages; ~499