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The Rules for Value Creation

June 27,2023 Stallion Asset Blog

McKinsey in August 2022, came out with a brilliant report postulating “Ten Rules of Growth” for an organization. The report articulates that Organic Growth is very hard to sustain, and especially after the Global Financial Crisis, where the growth rates have slowed down dramatically.

In a study of 5000 listed companies, only one out of eight companies grew more than 10% CAGR from 2008-2019, and only one in fifteen companies grew more than 10% CAGR “Organically”. 80% of Revenue growth is typically translated to Market Cap Growth, thus the imperative for an Organization is to Grow First.

In this blog, we try to explain the “Ten Rules of Growth” in the Indian Context.

Rule #1 Put Competitive Advantage First- This one focuses on Starting with a Winning, Scalable Formula.

Just like Jeff Bezos Started off in 1994 by Focusing on the Fact of What will never Change instead of What will change which helped him to dial down to 2 main elements of “A Customer would always need Cheap Products and would need it fast”. He has developed Amazon around these 2 constructs and we believe over period he added another element of Newer Offerings which eventually led him towards Audible, Prime Video, AWS etc.

Dmart in India has taken One of such Construct and Built a Value Proposition of Every Day Low Prices around it which almost everyone in India has failed to replicate. They have hit the Nails right in the Head, With Growth, Expansion, Opportunity size, Coverage and Margins. The below picture should how a lot of players have either gone Bankrupt or have Consolidated, But Dmart stands tall and We believe will continue to stand tall for years and years to come.

Focus on the Core the Fundamentals of any industry. Some of the brilliant Consumer Companies in India have built both the Production advantage as well as the Consumer Advantage. The cheapest price to produce and to pull-in people to sell the highest volumes.

Rule #2 Make the Trend your Friend- Prioritize Profitable and Fast Growing Markets.

Here you would want to find Disruptive Ideas which are more Structural in Nature (Electric Vehicles) than being One Offs (COVID Vaccine/COVID Drug).

The First mover Advantage and Timing counts for a lot in here. If you are too Early you will eventually Falter on Growth, Regulatory Headwinds and Unclear Policies, If you are too late you will miss out to your competitors. Hence the most important element here is to:

—> Recognize that a Change is coming
—> Create a Roadmap as to How would you Create a First Mover Advantage and Expand from thereon
—> Be Ready to be Slow and Take a Few Hits as things Evolve.
—> Lastly Be Ready to Take Kick things off, as and when the Change gathers steam.

Examples of this within the Indian Context would be:

The Relative Returns made in the Ones with the First mover Advantage is Way more than the Ones that were Too Early or have been Late.

Rule #3 Don’t be a Laggard: It’s not enough to go with the flow- Competitive Outperformance is the Key.

Bajaj Finance is a  Classic Example of such Imperative. They have not only been able to Go Along the Flow but have been able to match upto/ Beat their Competitors quite comfortably. This is further supported by Best in Class margins, Return Ratios, Large Opportunity Size, Strong Geographical Presence among other things.

The Below Table gives you the difference between the Growth that Bajaj has seen relative to others, Only Cholamandalam comes near, But Share price Returns there is no comparison. One place where Chola suffers a bit is on the Cyclicality impact because of its exposure to Auto Book, but the Stock has no doubt done very well over the years.

Rule #4 Turbo Charge your Core- Focus on Growth in your Core Industry- You can’t Win without it.

I don’t think there would be any better Examples than Dmart, Bajaj Finance here. These Guys have solely focused on their Core and have made the competitive advantages much stronger in the process. Even Eicher Motors have solely focused on Creating wonderful biking experiences for Consumers through their Cruiser bikes, staying true to their Core despite launch of Multiple new platforms.

—> Dmart- Focused on Slow and Steady Expansion, Same approach relative to what it was focused on when it started. Own and Expand in Clusters. There have been many companies which have poured in Capital to Expand faster, but you could see who sustained and who went under.

Rule #5 Look Beyond the Core- Nurture Growth in Adjacent Business Areas.

This strategy is focused on Expanding our Circle of Competence in Adjacent Business Areas which are Ancillary or Complementary to the current Business Offerings.

—> Bajaj’s Expansion in Application and Marketplace which can directly offer Customers to Buy from Bajaj’s Application and Take a Credit for the Product being purchased. Instantly ready to serve the country.
—> Nykaa’s Expansion into Fashion Space. They had all the Segments of Application, Logistics in place with a Large Potential Opportunity and an Established Brand.
—> Dmart’s Foray into Hyperlocal Stores/Ecommerce Delivery
—> Ethos’s Foray into Other Luxury Products (Luggage and Jewellery)

Rule #6  Grow where you know- Focus on Growing where you have an Ownership Advantage

Growing into Unrelated Industries can always be a challenge. It is further not a prudent thing to do when you have Opportunities lying within the Sector/Industry the company is present in.

SRF used the commodity Profits to be reinvested into Spec Chem business. Astral reinvested its distribution strength of the Pipes business for its Adhesive business, building a sizeable franchise here. Manyavar after the strengthening its Men’s Celebration wear market is pivoting to Women’s celebration wear market with the brand Mohey. Trent reinvested the Supply chain of Westside for the Zudio Format, creating a successful pivot in the Things they knew.

They leveraged the existing competitive advantages for new Pivots.

Most of the Successful companies you will see would be the ones where they have expanded within their Area of Competence.

Rule #7 & Rule #8 – Be A Local Hero and Go Global only If you can Beat Local

Well there is no doubt about the Fact that You are always better at your Home Ground be it Sports or Business. It is solely because you feel at home and you know how things work out here.

If One is not able to Win at home, It has a very low Probability of winning in a Market in which one will take time to understand, Grow and Expand. Exports always is a very hard game and an Expensive One.

Only Companies which are able to Establish themselves in India are able to gather enough Data to be able to move abroad. APL Apollo is a Classic Example- Only once it was able to sustain, garner 55% Market Share and Establish Significant Factories to cater to the Indian Demand is when it is now moving, expanding into UAE from where it will be catering to the GCC.

Zomato is an example of one which expanded quite aggressively and formed its presence in UAE, Africa without being able to stamp its foot fully into India and hence could not scale up the International Markets. Over the last 1 year they have shut down or are in the process of closing down almost all of their International Subsidiaries and have committed to expanding and Growing Purely within India.

Rule #9 Acquire Programmatically- Combine Healthy Organic Growth with Serial Acquisition.

Well the Best Growth you could expect from a Company is to Grow Organically and in Intervals giving itself that Boost from Inorganic Acquisitions which not only Accelerates Growth but if done prudently it helps the company in Expanding its Market/Capabilities/Offerings and Opportunity Size.

This is where Affle has stood out within our universe.

They have been growing anywhere between 20-30% Organically and have over the years Acquired Companies which have either Added to Affle’s Offerings or have helped in Expanding the Market of the Company. Jampp for example was the latter one with which Company got a Direct Entry into USA and LATAM Markets while the Business offerings were entirely the same as Affle.

Prudent Acquisitions allow the Business to sustain the competitive advantage, Grow and remain Differentiated for a long period of time. This allows the company to be valued Highly and Remain so for a long period of time.

Rule #10 It’s Okay to Shrink to Grow- Cutting out losers within the Business is completely fine. It takes a little time to realign things but it has in most of the cases proven prudent to do the same.

Like in the Stock market it is always prudent to Cut out your losers in the Business as well. There are always parts of Business which acts as a Laggard and a Pain for the Entire Business. These Segments no matter how Full of Heritage and Sentiments have to be cut or separated for the company to reach new heights.

As a Study of Mckinsey (In the Picture below) has shown that Divestitures of Poor Businesses within the Large Business has actually generated 4% Excess Returns over the Benchmark for Longer Periods of time.

We have recently seen VRL Divest its Bus Business which was not able to add onto the Growth the company was expecting for from its current Business. This should help VRL get the necessary Cash and it should be posting Strong Growth in the Trucking business now going forward.

Usha Martin similarily divested the loss-making Steel business unit to Tata Steel, and the value creation since that event has been just phenomenal.

It gives us an interesting idea to think about What all factors one could watch out for while Studying companies focusing on the Ability to maintain a Sustainable Growth trend for a very long time to come.

The more Factors a Company has been able to drive on, the better it is positioned to maintain such Leadership and Outperformance.

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