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The Scale up!

January 10,2019 Stallion Asset Blog


For last 6 months I have spent considerable amount of Time in Understanding the Scaling up of a Business, what does it take for business’ to scale up in India because thats where the largest money is made!  


It has been very hard for most Small Business’ to become big in India & the reason for this is because as soon as you start making 20-40 Crores a Year competition comes in very strongly & tries to disrupt you in every possible way.


Out of 100 business who are Nano Caps with 1-5 Crores of Profits (20-50 Crores Market Cap) , 20% of Business reach the Small Cap Stage of 20-40 Crores of Profits (300-500 Crore Market Cap) if tailwinds are strong though only 5% of those 20% make it to 100 Crores of sustainable Profits.


Once a Company reaches the 100 Crore Profit & is the leader in the niche, it becomes really difficult for Competitors to beat them as they now have Distributor network, good 2/3Rd level management team. The Journey from 100-500 Crores is where the PE Ratio’s typically get re-rated the most, the company gains market share from other unorganized Players & a Multibagger is created. Typically Growth slows after the company crosses the 500 Cr Profit Benchmark as it’s now a leader already & can’t grow more than the Market.


I have divided companies in 4 Parts explaining what can get a Scale up or continuation of Growth.


1)Distribution with New Products – West Bridge Capital Understood the game of Distribution very well in 2014 by betting large on companies with large distribution network like Kajaria, La Opala, Hatsun etc. If you have 10,000 Distributors you can keep selling new products in the same distribution channel for higher Growth.


For Example Havells started with Wires which are typically sold in electric stores & then expanded into switches, then Light bulbs & then appliances like Fans, Heaters. They were selling new products to the same distribution channel & increasing their wallet share in the store. Lately they have bought over Lloyds AC & have entered the Consumer electric market which is typically sold in Croma’s & Vijay sales of the world. They have got the distribution channel of Lloyds who has 16% market share in A/C, only 2nd to Voltas with 23% Market share. Understanding the evolution of Havells, I am absolutely convinced that A/C is just the Start, you would soon find them in absolutely everything like refrigerators, washing machine etc. The Game is distribution, Companies with long distribution relationships are a moat though a Company with Great Distribution with a Brand Name is the strongest Moat.



Lately in my understanding of the Tile Industry, I understood that Tiles companies are just distribution business model & brand name doesn’t work much. For example Once a Tile is put in your bathroom how would someone know if it’s a Unorganized Morbi based Player tile or Kajaria’s tile. Except in the Super Premium Category, the business is just about distribution.



2)Parent Support – The Likes of Bajaj Finance wouldn’t have been able to reach where they are today without the support of Bajaj Auto. Bajaj Finance started with giving loans on two wheeler’s for the Bajaj Auto customers, understood the lending business well & then Scale up into other segments like Consumer etc.


Same is the Case with LTTS & LTI who were primarily in-house L&T technology teams, acquired knowledge & understanding of both Engineering R&D Technologies (LTTS) & Application technology (LTI) from L&T’s in-house functions & are now scaling up.


SBI Life is again a similar case where the 50-60% of the distribution of their Insurance happens due to the amazing branch network of SBI bank. SBI Life is by far the fastest growing Insurance Company in India.


Mahindra Logistics came out with an IPO lately with 3PL Logistics systems but here again 60% of the Business comes from Carrying the tractors & cars of Mahindra itself. It has acquired the know-how of the business & now providing their services to third Party.


Muthoot Capital is again has been able grow very fast in 2 wheeler Financing in last few years to due the branch network of its parent Muthoot Fincorp (3600 Branches).


Parent Support helps business scale up really fast in the Initial days due to a networking support while during this phase they invest considerable amount of Money on people & technology which again helps them scale up a lot faster.



3)Change in Business Model- There are a lot of business models where an incumbent player can’t change its model whereas the New Player can change the way business is done as he has no baggage. Brokerage Industry is a good example of this model whereas Incumbent players couldn’t change the brokerage rates from 10 to 30 Paise per transaction as they had institutional clients whereas companies like Zerodha offered 20 rupees per Transaction flat & got the Retail market share. This year Zerodha made more profits than Edelweiss Capital Market Division & that of Motilal Oswal.


The same is the case with Wealth management business (Primarily Selling Mutual Funds) where even though banks had an upper hand of client relationships, companies like IIFL Wealth (2 Billion$ valuation) & Edelweiss were allowed to gain market share. If money is kept in savings account the bank would have to give its clients just 3-4% Interest on the deposits whereas it could lend at 10% via housing loans (very less risk) & make a cool 6-7% Spread per year. Now if Banks become aggressive & start selling mutual funds, they would get only 1% as fees from the Mutual Fund Company but lose out on the cheap savings account balance. It makes absolutely no sense for banks to sell Mutual funds for 1% Commission but to keep money in CASA & make a cool 6-7% spread.


The Banks had no option but to lose market share to Wealth management companies like IIFL wealth & edelweiss. Even Kotak bank who was very aggressive in wealth management till 2011 starting giving away market share as they understood the CASA game.



4)Technology- Of course, the Primary differentiation between a leader & not a leader in any business model in 2023 will be adoption of technology. PayTM has acquired 20 Crores Clients in last 30 month via Digital means whereas ICICI & HDFC both took 30 years to acquire 4 crore clients. Technology platforms like Amazon, Google, Uber have already shown the way to solve large problems. A business cannot theoretically scale up without High ROCE or High capital inflows (Cash Investments).


A Large reason why Bandhan has 1 Crore Clients is because of invention of tablets & Mobile Internet, they are one of the biggest gainers from Mobile Internet. Micro lending will the one of the biggest beneficiaries of Technology as democratization of credit gains momentum. Bajaj Finance added 40 Lakh Clients in just last 1 quarter and has 3 crore clients today.


OYO was created in last 4 years & has a Market cap of 35,000 Crores just because of the Consumer mobile Internet in an Industry like Hotel where nobody has ever been able to make money.. We Believe technology is one place where large scale up in business can happen in 2019.



DISCLOSURE: The following blog is an extract from our January 2019 monthly newsletter written by Mr Jeswani, CFA , CMT. The stocks mentioned are not a recommendation in any way and should be used for informational purposes only.

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