Business Quality 2.0: Towards a more holistic VP BQ Framework for Emerging Moats

[Donald]

Perfect Kedar! Another thought-provoking variant perspective arriving from personal experience sharing. There is great merit in these arguments esp. with the perspective of emerging moats…where things get clearer in 2-3 years of familiarity with business/management - it’s never on day 1. No business becomes great by itself without enabling tailwinds, that’s a given. But there are few that stand out and execute far better - multiple reasons including superior business model execution driven by superior Management.

There is no reason that both I & O digging (as you so aptly put it) outputs - shouldn’t be part of our BQ framework detailed data points. Please continue to share more perspectives from your experience set to incorporate. Unlike common perception, Frameworks aren’t about simplistic pattern matching (which some do fall prey to in lazy attempts, seen from folks we know), in-fact frameworks are all about heavy-duty grunge work sitting right behind the abstractions. Minus the business/industry/domain obsessed grunge-work, simply-fitting to frameworks is worthless, I agree.

I find exposure to frameworks help us achieve more structured deep-dives, which I am naturally inclined to. It brings much needed rigour. Now deep-dives can and should be attempted from completely open-ended divergent perspectives too. These can be equally rewarding. What works best for me is when we can balance/marry the two successfully. It happens naturally for us in our team - Ayush is always more open-ended naturally, me more structured naturally - wherever our interests converged it’s mostly worked it’s magic. So yes I do appreciate starting from a completely open divergent perspectives is actually great, as long as somewhere down the line we bring-in structure and rigour. Which is why, many might have noticed, this whole BQ pursuit is encouraging unstructured divergent inputs, at appropriate times we need to inject structure. Some have already complained to me, Donald there is no structure to the new BQ initiative, it is going all over the place , and I am letting on it’s more deliberate.

So, as rightly pointed out by you - It’s NOT about fitting a business to a framework BEFORE you/team around you have done enough hard work on collecting the facts about the business/Management/industry/competitive forces. It’s AFTER. Absolutely, agreed.

Now to set some context right, from us framework-believers .

Some use-cases:

1. If one has a natural mindset like me that makes one very very choosy, and after 2-3-5-7 years of decent familiarity with the business/management and domain - where you are tracking multiple businesses that you think could be special - like what Ayush’s pipeline keeps supplying - having a super choosy framework that progressively gets refined better and better makes enormous sense. One needs to pick just 2 from a Concentrated Portfolio perspective in a year. Sans any framework, I wouldn’t even know what to look for, let alone choose well. A framework certainly helps sharpen and retain focus when one is spoilt for choices - not difficult to imagine the situation only a few months back in the financial services space - did most people automatically choose the number one performing business in the financial service space, despite most sharp investors probably knowing the numbers behind only too well?? Fitting to the framework, after all grunge work is done, when spoilt for choices has worked beautifully in the last 2 years too, and created huge wealth. A Bajaj Finance, a PI industries are prime examples, as are HDFC Life, and many others. Many ways to skin the cat , period. One should stay with what one is comfortable with naturally, and occasionally intentionally break comfort zones to expand horizons, like you are doing now.

2. An often neglected part is proper Risk Evaluation. Without that, we are probably just plain lucky; can’t sustain and ensure repeatability of success. I am pretty convinced - even more than BQ/MQ we need a proper discussion/debate thread towards a proper VP Risk Management Framework 2.0. We know only too well what happened in the last 2 years for almost all folks we know, don’t we? A Risk Management framework is the need of the hour for VP 2.0 and essential for sustainability in the next decade. Only this evening I had a brief very invigorating discussion with someone (whom we all know) who perhaps has the best performance in last 2 years of folks I know - and he swears by Risk Evaluation - a framework that is work-in-progress for him too, no doubt. But hey VP Risk Management Framework 2.0 has a committed believer and driver, who will launch that most useful thread potentially (in our current Investment learning curve context) hopefully pretty soon, on VP.

3. And don’t we know the best use-case for frameworks. Exposing newbies quickly to best practice thinking and execution, get them to quickly up the learning curve, for the most passionate and hungry learners in any trade. Had Mr D not exposed me to a Capital Allocation thinking framework that got me hooked in 2011 that we captured back in a thread and got everyone than majorly involved, most of Team VP newbie performance curves would probably look very different today.

4. Am aware frameworks have much lesser utility value NOW to senior practiced professionals perhaps because innately they have learnt to do their job better and better - but how would someone unexposed to your set of skills aspire to capture that for his and others benefit. Only via frameworks - is my true enduring belief and aspiration - that we can think of capturing back best practices from most successful sharp minds around, and try and transfer that to every passionate aspiring learner - that we can aspire to create a scale-multiplier effect?

5. Some people are naturally skilled and very very sharp - they will always have less value for frameworks - like our very own Hitman @hitesh2710 - he is so sharp that he picks up on the key abstracted learnings the fastest, and yet he knows and acknowledges the value of frameworks - because again he knows he will smartly imbibe the key best practices unlocked, probably the fastest . and nicely embed them in, in his own sub-conscious framework. Oh! Yes, every practised senior has a decision-making framework wired-in that works well for him. Our endeavour is to unlock that magical wiring and bung in some of that in a structured framework :)

Rest my case on the utility value of frameworks, for everyone!

Bottomline - everyone NOT convinced about the framework pursuit (well-meaning friends call it my obsession) please IGNORE frameworks case and fitment before, or after debates . Just be generous and share your experience-set in what worked and what didn’t - and it’s for us framework-believers to find a way to abstract the key learning-skills back into the framework.

[dineshssairam]

I am, by no means, an expert. But one of the most defining pieces of financial literature I’ve ever read is Michael Mauboussin’s “Measuring the Moat”. Clearly, this goes with ‘Sustainability’ part of the framework.

I am simply going to summarize the fairly long paper here, in the hopes that we can determine if at least a majority of the “measuring” can be done for the Indian market. In addition to this, I am going to add my own addendum to the paper in a very few places. So if you see something amiss compared to the original work, it’s just me trying to improvise.

Here’s the short legend for what I’m going to write below: Wherever you see a word bolded, it’s a concept / cog of the model. Wherever you find an bolded and italicized phrase below, it is a data point that we should attempt to get for companies in India (In the paper, Mauboussin has used data from U.S. companies).

Competitive Life Cycle: Firms go through 4 distinct cycles and where they are usually determines what they do: (1) High innovation; (2) Fading returns; (3) Mature; and (4) Need restructuring. The idea is that a firm’s Return on Capital (RoE / RoCE / CFROI) converges towards the firm’s Cost of Capital over time. As long as the Returns are above the Cost, firms create Value (Called “Economic Value Added”).

| Industry Analysis |

Industry Analysis is split into 3 parts: (1) Get the lay of the land; (2) Assess industry attractiveness through an analysis of the ‘five forces’; and (3) Consider the likelihood of being disrupted.

Get the lay of the land

1. Construct an Industry Map, covering all parts of the value chain and to assess the size of the industry. Create a Profit Pool (Operating Profit / Net Profit) to assess which parts of the chain are the most and least profitable.

2. Measure Industry Stability by laying out Market Share changes over a long period. Lesser the change in market share, the better. Use Pricing Stability (Operating Margins) to determine pricing power (Correlation to Raw Material prices over time is optional). More stable, less correlated Margins are better.

Industry Attractiveness

Determine Industry Structure using the Porter’s Five Forces model. Porter recommends using industry analysis to understand “the underpinnings of competition and the root causes of profitability.”

• Supplier Power: What kind of leverage does your supplier have over you? Check Payable Days with regards to the Industry Average Payable Days.

• Buyer Power: What kind of leverage does your customer have over you? Check Inventory Days and Receivable Days with regards to the Industry Average Inventory Days and Receivable Days.

• Threat of Substitutes: How likely is it for your customer to switch to a substitute product? Difficult to measure, IMO. Perhaps check Market Share of a company’s individual products Vs the substitutes (No issues for single product companies).

• Threat of New Entrants (Barriers to Entry): How easily can a new entrant gain market share? Check the Rate of Entry and Exit (No. of firms entering and exiting the industry) for the industry in question over a long period (Something like what @dd1474 did for figuring out the Survival/Mortality Rates?) . For an even deeper analysis of Barriers to Entry, study: (1) Asset Specificity; (2) Scale of Production (Existing Fixed Assets compared to country average); (3) Capacity Utilization; (4) Reputation; (5) Contracts, licenses, patents (Countable, comparable with industry average - perhaps order by difficult to get) (6) Learning curve benefits; (7) Network Effects; and (8) Exit costs (Losses in the last few years of firm that exited the industry).

• Competitive Rivalry: User the Herfindahl-Hirschman Index (HHI Index) (Need Market Share details for at least 75-90% of the industry) to determine industry concentration. Typically, industries with a HHI Index score > 1800 are said to be less concentrated. Concentrated industries are more profitable than crowded industries.

Disruption and Disintegration

Christensen’s “Disruptive Innovation” Model. Too subjective to summarize here. Here’s the original paper. The basic idea is that there are three types of disruptions: (1) Sustained Innovation (Small players continuously innovating new processes/products); (2) Low-end Disruption (Predatory Pricing); and (3) New-market disruption (Creating a completely new, non-existent market, but offering to the same customers)

| Company Analysis |

Company Analysis to be added later.

Meanwhile, here’s a nice checklist from the paper for the whole shebang: Value Creation Checklist.pdf (167.9 KB) (Pages 56 and 57 in the original document)

[Donald]

@dineshssairam - Bravo! Cometh the hour, cometh the man!
Thanks for intervening and injecting much needed structure to influence discussion direction. Please keep an eye out for the holes in our older BQ practicals - from the investment literature dive you are on. Will come in handy when we are done with the divergent inputs collation. Dive deeper, and keep helping summarise for all of us - commendable work, again. A request, please start on applying/adapting these to one/some emerging business you like and have done/want to deep-dive grunge work on. Will be immensely helpful.

Now, we are free to get back to collating more open-ended thought-triggering experience sharing @zygo23554 waiting for your next salvo, as promised.

[zygo23554]

About a couple of years ago I had started working on viewing the exercise of business analysis/business quality through the lens of an operating manager (O) in addition to thinking like an investor (I). While I did not go ahead and formally capture this in any framework, I made efforts to internalize this mental model and apply this to any business I end up evaluating. This I do after doing the usual in depth work and number crunching which we investors usually do. I did put this into some slides purely for my own use, but taking the liberty of putting this up here. So in a very good way @Donald has motivated me enough to revisit this and evaluate if I am actually putting my own gyan into practice Answer - To some extent I am, but I am nowhere close to doing this well enough consistently

My sense is some of these can work as a good complement to whatever BQ framework one is using, it is just a slightly different way of asking the same Q’s and thinking deeper. This works very well for emerging businesses since it also streamlines the line of Q&A one can take with the management during interactions. Managements love it when investors start asking them questions related to operations, ask these Q’s to any management and you will see a distinct change in their body language and energy level.

Splitting this into parts for better comprehension

Part I

Core principles (arrived at based on my own real world experience)

• Tangible offering matters – however intangibles matter equally (sometimes more)
• More the number of decision makers involved – greater the complexity of selling & higher the entry barriers (direct implications for duration of the sales cycle)
• High switching costs occur when customer usage/habits are linked to the offering
• Relationship based pitch too early in the sales cycle indicates a non differentiated offering
• Charging a premium is easier than it sounds if the customer sees value
• Difficult to pinpoint the core value add in any intermediation businesses at first look
• How salesmen spend their time is a lead indicator of how the business will pan out over the medium term

How do people make the BUY decision

[zygo23554]

Part II

Following are the key questions I start asking myself when I wear the O hat, notes/examples for different businesses included so that the relevance becomes clear…

What enabled the entrepreneur to build the business in the first place?

Important to take a story line & contextual approach, most things are a factor of time & place.

Knowledge gained by working for someone else (AIA Engineering) or from markets that are more advanced (Amara Raja Batteries)
Ready relationships one can tap into and create the customer base (TCPL Packaging)
Commodity business that has evolved/evolving into a value added business over time (APL Apollo Tubes, Garware Wall Ropes)
Tie up/JV with a foreign entity that is willing to bring technology while the local partner manages operations (Auto ancillary value chain)
Beneficiary of an industry tail wind/an idea whose time has arrived (IT Services, E-commerce)

This in my opinion is the best place to start when one is looking to identify entry barriers

What kind of customer relationships will the entrepreneur need to run the business well?
Direct Sales - How many touch points within the customer organization? At what level?
Channel Sales – Where does the power balance lie in the relationship? Most distributors work on the empanelment model since 1) much easier to run ops when the vendor list is consolidated 2) incremental effort for sales is optimized 3) better terms with higher volumes per vendor

How easy is it for customers to switch to alternative offerings?
Switching involves steps – access alternatives, evaluate & decide (needs incentive to shake out of inertial loyalty)
It is easy to dismiss most businesses on this parameter, think deeper. Understand the role of intangibles in the decision making process, other than fast moving goods all other brick and mortar businesses have elements of switching cost (do marginal differences in cost and quality make for enough incentive to switch?)

Is this a business enabler or a business driver? (e.g. residential real estate)
Customers tend to spend less time negotiating with business enablers since proportion of cost towards this is lower

How high is the annuity/repeat component of the business? (e.g. auto ancillary, packaging)
Higher this component, more the emphasis on reliability, relationships & ease of doing business, pricing will always be a challenge. However minor improvements by competition cannot take business away

Is the industry structure consolidated or fragmented?
Consolidated structure implies stable pricing, too many players entering means volatile pricing and business terms are experimented more

What is the extent of product/service differentiation among the key players? (e.g. Ceramics)
Lower the tangible differences, higher is the component of intangibles in decision making

Does the offering have a setup service attached to it?
If yes, the stakeholder performing the service becomes a key influencer in the customer buying process (e.g. system integrators in IT, fabricators in steel pipes, work technicians for plywood)

Has the business traditionally spent more on ATL or on BTL?
Usually a tell tale sign of the power balance between the OEM and the channel. Also analyse how this mix has been changing over the period, usually a good way to detect changing power balances and transitions

Any traction on concentrated buying centres emerging as an intermediary?
Look for presence of network effects in any emerging intermediation model, if so be very wary

[zygo23554]

Part III

What sequence would I follow to make this exercise more structured?

Learning drawn from my experience of applying this perspective to businesses over the past 2-3 years

• The customer perspective is usually the best perspective to view any business. Most stock analysts do not understand this perspective as well as business people do. If you have run P&L in a professional company, you have a better chance of cracking this than most analysts

• Competitive advantages are a factor of time, place and multiple things working in unison. One can at best have a framework ready for analysis but the analysis needs to be deeper and consider various perspectives. Always take a storyline approach

• Brand + a sticky distribution channel in a consolidated industry structure is a very powerful moat. Usually the tangible points of difference across offerings is low here and the intangible factors in customer decision making dominate

• Understand that the enterprise selling cycle is very long. A well entrenched market player in a segment that is characterized by infrequent technology changes has likely built a customer base that suffers from inertial loyalty (this by itself is a switching cost)

• Always invert when you analyse, things are usually the way there are for good reasons. Hypothesize on what these could be, over a period of time one can make sense of things

• Using a checklist helps ingrain thinking patterns till they become drilled in. However the checklist should never be the focal point of an investor

Unless one is able to translate the qualitative analysis into tangible inputs to the valuation model, all of this becomes an exercise in theory

[desaidhwanil]

@Donald, @rupeshtatiya, @zygo23554 and others, amazing pace and quality of discussions on this thread. Really feel invigorated as the new perspectives opens up new way of thinking and re-visiting your hypothesis. I really think the difference in perspectivel between the investor and an operating manager as brought out by Kedar is a brilliant idea to capture in framework…although I don’t lnow how we can do it without making it too complex… but I think it is a must have in version 2!

One thing that I have learnt is that in almost all the businesses out there, there are only 2-3 variables/attributes that drives the business performance and leads to success/failure. The only way to get some handle around the business is to understand these 2-3 key drivers of the business in detail and think throught the factors affecting these 2-3 attributes/drivers. Unfortunately when we start working on elaborate framework, the due focus on these key drivers get diluted and we start putting in generic attributes/aspects of the business (which doesn’t matter much) in place where the marginal utility of the information diminishes.

To put this in context- let me give example- For a company like APL Apollo- a key driver of business strength performance are only

• Volume growth and through higher than industry volume growth margin expansion
• Ability to create expanding product basket that includes continuous introduction of innovative products

Everything else is a derivative of these two attributes as they operate in a near commodity industry . If you look at the success of APL, as long as they have executed well on this parameters…they become stronger as business.

Similarly if one is analyzing Jubilant foodworks or westlife development - the key focus has to be on SSG- what drives SSG? If SSG is not encouraging - what are the factors behind them? In case of Jubilant - around 2014 - it was very clear that negative SSG was the sole contributor for bad performance- however if one digged deeper- one would have understood that the key reason for SSG not growing was not the tough environment etc as claimed by management but it was the lack of value proposition offered by the Pizza compared to other QSR/dine in option. I distinctly remember that if one had to order Pizza for family of 4 - it would have cost no less than 1200-1500 Rs while in same or less cost one would have dined out in non-metros. Thus the basic value proposition was misaligned- As soon as new CEO came and addressed this value proposition problem by offering everyday value - 99/199 Rs option- footfall grew, conversion rate improved, SSG bounced back and margins improved. It is like pieces of puzzle falling in place.

Even though it may sound too audacioous, I feel our framework need to be decluttered and be more focused on what is important/critical for business performance and be less generic- at least that has to be the 70% of effort. This will also mean that for each business there may not be the same questions/ponderablers - but there is no dictum to make a generic framework right?

[basumallick]

Very very interesting perspectives. However, let be play the devil’s advocate and be the sceptic that probably comes naturally to me.

All this framework etc is nice to have and good to slot businesses. The challenge is if you take them too seriously. They need to be starting points and not endpoints of analysis.

The reason I say this is if you think of any framework / any model and any parameter you can always find examples of companies doing well and ones which will do poorly.

As I drilled myself in my head when I started maturing as an investor - “The market is a complex adaptive system.” It is too large, too dynamic, too complex to be correctly modelled. Else, it would have been modelled by now. Think about this. We are able to get cars drive themselves, we can get unmanned vehicles to the moon, but we are not able to figure out which company will do well and which will fail.

If a company with all its resources like SoftBank can fail visibly and miserably in judging WeWork and other such companies, why have the ego and hubris to think we are able to do a better job, especially when in hindsight we have not been able to do it with any great skill? Most of the VP picks did well because the team here were able to understand and catch the tailwind of the specific industry and/or the specific company. Tons of examples, Shilpa, Mayur, Ajanta, Manjushree etc. Can we refine the existing frameworks? An emphatic YES. Should we take them too seriously? To me, clearly no.

One of the best frameworks I have come across is the QGLP model. Yet, even with applying such a robust model, the founder of the model makes the mistake of buying Manpasand. Raamdeo Agarwal is a much better investor than I ever will be. And he armed with a great model can still get blindsided by what happens in reality.

The use of a framework, to me, is more for a negative screening tool AND a deep-dive tool. I follow the QGLP model, and it helps me dig deeper into questions related to individual aspects of the model.

Any model needs to be high-level enough so that is useful for customising and facilitating deep dives. Individual companies will have their own dynamics. Sometime as @desaidhwanil mentions, industry-specific dynamics will be of paramount importance. However, history is replete with examples of companies following similar strategies but ending up with completely different results. Can anyone explain why Infosys did so brilliantly and say a Mastek underperformed in the last 30 years? They both started within 1 year of each other and see where they are today. Easy answer, looking back today, is management quality was superior. But was it apparent then? I can sight literally hundreds of such cases across industries. We look at the “stories” and create a narrative fallacy for ourselves.

So, to conclude, my brief point is, use a framework to dig deeper. Keep that framework a live one. That is, keep updating it when you get new learnings. Keep it flexible. Read and understand the history of companies and industries as much as possible to get a “context” of history. And finally, two more things – i) don’t take yourself too seriously and ii) keep some leeway to make mistakes and adjust for it.

Apologies if I sounded a bit negative … that was the intent

[basumallick]

Just to add to my thoughts to the above:

What is a good business? What is a quality business?

Lawrence Cunningham in his book Quality investing defines quality businesses as those which can generate high levels of free cash flow, return higher than cost of capital, is sustainable and can grow its earnings consistently over long periods of time.

In another excellent book, competition demystified, Bruce Greenwald talks about entry barriers. This actually roughly ties in with the sustainability of earnings point.

Michael Mauboussin writes this about good quality businesses:
A high-quality business is one that is profitable, typically as a result of high margins, has relatively low debt, a very capable management team, and a business that is unlikely to change abruptly in the near term. So essentially it is a business with a high return on invested capital and stable prospects.

And this about good management:
All roads in managerial evaluation lead to capital allocation. A high-quality management team is one that knows how to take resources, including capital and people, and put them to their best and highest use. Quality executives are ethical, open-minded, thoughtful, judicious risk-takers, transparent, and long-term oriented.

The challenge is all this is very difficult to figure out in real-time. Most of the time, tailwind or headwind in the business makes a management look far better or worse than they actually are. We, most of the times, have to go with our gut-instinct about the management based on a few interactions or how they speak etc.
Example - When Pidilite management is able to brand a commodity business they are termed after many years of success as visonary. Asian Paints was able to do the same. When Astral was doing it the same thing was being said. Now I hear the same thing for APL Apollo. But no one talks about all those other players who also tried creating brands and failed miserably (not for the want of trying). Nerolac, ICI, Dendrite etc. They remained marginal players in the same industry. Even DHFL used Shah Rukh Khan as their brand ambassador. A world of good it did for them!!

Next question is then how to distinguish between a good and a great business? Or conversely, between a good and mediocre business.

One thing I have firmly seen is a consistently good return on capital (whichever way we measure it - RoE, ROCE or ROIC etc) for a good business. But a good ROCE does not automatically mean that the business or its earnings are sustainable for long periods of time. Or that the business cannot be disrupted materially by external or internal conditions over a short period of time.

Back to Mauboussin. On source of competitive advantage.

The closest thing I’ve seen to an empirical study of this question is the work by Michael Raynor and Mumtaz Ahmed, consultants at Deloitte, that was discussed in their book, The Three Rules . They analyzed thousands of companies going back to the 1960s and suggested that superior performance, results that are above and beyond what luck allows, is the result of companies following two rules. The first rule is “better before cheaper.” In other words, do not compete on price. The second rule is “revenue before cost.” Successful companies focus on increasing sales rather than cutting costs. The title suggests a third rule, which, irritatingly, is that there are no other rules.
Those rules seem closer to a differentiation strategy than a cost leadership strategy.

So, question to ponder is this – is there genuinely a way/model/framework possible that is going to help drill down business quality into its components? Or is it just a chimera we are running after?

I will end this with the following study done by McKinsey on the 50 companies appearing in the 3 seminal books - Good to great, Built to last and In pursuit of excellence.

Performance of the “excellent,” “lasting” and “great” companies vs. the S&P

	"In Search of Excellence"	"Built to Last"	"Good to Great"
	(1982-2002)	(1994-2004)	(2001-2016)
Stars (more than	Wal-Mart	Philip Morris	Phillip Morris
5 percentage points	Intel	Marriott	Nucor
better than the market)	Merck
	Johnson & Johnson
Outperformers (more than	Procter & Gamble	American Express	Kroger
2 percentage points	Avon Products	Johnson & Johnson	Wells Fargo
better than the market)	Walt Disney	IBM
	DuPont	Wal-Mart
	3M	Nordstrom
		3M
Middle	Dow Chemical	Procter & Gamble	Gillette (a)
	Bristol-Myers Squibb	Boeing	Kimberly-Clark
	Boeing	Walt Disney	Walgreens
	Amoco (a)	Merck	Abbott Labs
	Emerson Electric	Hewlett Packard
	McDonald’s	General Electric
	Caterpillar
	Texas Instruments
Underperformers (more	Maytag (s)	Ford
than 2 percentage points	Hewlett-Packard
worse than the market	IBM
	Delta Air Lines (s)
Failures (more than 5 pct.	Schlumberger	Citicorp	Pitney Bowes
pts. worse than the market)	Kodak (s)	Motorola	Fannie Mae
	Raychem (a)	Sony	Circuit City (b)
Key	Amdahl (a)
(a) Acquired during	Dana (s)
evaluation period	National Semiconductor (a)
(b) went bust during	DEC (a)
evaluation period	Data General (a)
(s) subsequently acquired	Kmart (b)
or went bust	Wang Labs (b)

We came to some interesting, even surprising, conclusions.

Great companies were more likely to do really badly than really well.

Their odds of outperforming the stock market were 52-48, hardly better than a coin toss. But there are more big losers than big winners on the lists. Just eight companies outperformed the index by more than 5 percentage points, while twice that number underperformed by the same percentage.

source: https://www.marketwatch.com/story/great-companies-are-more-likely-to-do-really-badly-over-time-than-really-well-2017-07-12

[Donald]

@rupeshtatiya

Axtel industries is what I would like to call is a “soft monopoly” (like Poly Medicure). The gap with nearest competitor in terms of capability/customers is quite large. The management seems like a technocrat management. There is clear cost advantage with global competitors like Buhler. It’s a different matter that Buhler is far ahead in terms of technical capability. The company has been doing projects for customers like Nestle/Hersheys/Mondelez/ITC/Amul etc. & some projects in export markets etc. Superficial tracking of end industries shows that - chocolate industry is growing at 15% CAGR & there is talk of CapEx. Nestle is talking about product introductions & CapEx. ITC is in perennial CapEx mode. Most snack players are in growth phase.

Was just wondering if we have Food Process Engineering domain professionals within VP? If yes, do put your hand up - What are the key questions a food process engineering professional would ask to Axtel Management to evaluate if they are ready/equipped to scale up and move to the next level?

As a way forward that is the best way to get some insights into Rupesh’s poser, I think.

Thanks

[constantseeker_]

I agree with @basumallick dada that this is a rabbit hole which can go as deep as we want. We need to have few key starting points and then go from there.

The other way to look at this is to invert and see why good companies don’t scale and track those/discuss them.

One of the things which of course is visible in hindsight is building of team. Typically, when we entered any of the stories they were promoter led. But if the ambition of the company was to go big then they need to seriously invest in good, best in class talent.
I often look at placement companies of top schools in the country ( IIT, NIT, B-Schools…should be more) but have I think except for PI never found any of our companies in the list. To that extent have never seen except Atul Auto-post a job opening on premier job sites like iimjobs.com or cut shorts.
It is I think foolhardy to expect that you can be in big boys league but the team is not skilled for the same.
Since then it is now a part of my thinking process, that if I don’t see our companies recruiting well then scaling up beyond a point is going to be really a low probability event.

[prakharg200]

@atul1082

U HV used RM I n the last para.grateful if u could add the full form

RM stands for Raw Material.

@atul1082

also some companies, that can be studied by us currently based on your post.

To start with you can study about some companies mentioned by Rupesh like Axtel Industries and some old proven companies like those mentioned by Donald sir e.g - Avanti feeds, poly medicare, etc.