As this forum is about entry-exit, i would like to ask the members to explain what a moat is in simple terms. I have checked almost all definitions but what I can’t understand is which company in these times will have a product or service which is so unique that no other company can produce it. take for example pharma, almost 90 % of major companies manufacture/trade same drugs(off patented). The only difference is in their marketing strategy. Is this a Moat?
Another example, banks. Banking in india is boring. same products, almost same interest rates, slightly difference services. how to determine a moat here?
I suggest you read one of the many books mentioned in the “must have investing books” to understand it. Most books on Warren Buffet will talk about it.
Raj: I had read this earlier but could not imbibe much. But I must say re-reading it today made things much clearer. Thank you. One more thing, prof Bakshi is from a rare breed, sheer intelligence combined with logic. Apart from Ashiana, Thomas cook and Relaxo; is there anything else in public about what he holds?
How to evaluate customer royalty especially when people maintain their accounts near by their residence or office. To ask more, if a small bank say south indian bank which has good presence in South but are expanding in other parts as well, how not to miss it as moat can’t be measured with just 2-3 branch in your city.
Dear PD Complexity in regards to R&D effort, time, risk, resources. This MOAT is sustained by quality audits, price controls, legal cases.
In banking 2 new banking licenses have been given by RBI after 10 years so this is the real entry barrier and then the MOAT is sustained by customer loyalty of people who are already account holders of old banks. How many people will change their bank from say HDFC to IDFC after they start their banking operations?
I am also learning so excuse me if I sound naive. I hope to learn from the seniors in this blog if I am thinking in the right direction.
The complexities that you have mentioned holds true for almost all companies in the same sector. Isn’t it?
More banking licenses are to be allocated in 2015. Ok, loyal customers won’t change their account but lets say if someone has to open a new account and IDFC is nearer to his office/residence giving him all the e-banking, mobile banking with user friendly app, almost everything that a normal bank provides, the I think he will knock the doors of IDFC for sure. And he will surely tell to others about this. (social proof tendency)
Banking businesses are good businesses and their profitability and fundamentals are intact. This is true for some private sector banks in India. Of course there is hardly any differentiation in products. The moat could be in the form of switching costs, which is the expense that customers have to incur if they shift their bank account. Since customers issue cheques, pay bills, credit cards, have ECS, etc it becomes difficult to shift a bank account. Apart from this think about borrowers or customers who have taken a loan. Once the loan terms are set the bank is sure of getting a stream of cash flows, and if the loan is secure the risk is minimal. Now these aspects constitute a moat and gives the bank a good customer base to work with.
Apart from this some banks also have a strong brand name or franchise. This could come from reputation, strong relationships, regional presence, etc. For example South Indian Bank, Federal Bank have strong roots in the state of Kerala even though they are expanding to multiple cities and states. Moreover, banks enjoy the advantage of FLOAT, which is the money that savings account holders and depositors keep with it. The min. balance maintained by account holders is a huge low-cost float which can be used for short-to-medium term lending. Term deposits are a good source for medium to long-term funding. So here the bank is simply taking money from people on one side and lending to industry/other people and taking a neat cut. This may sound like small profit, but when it runs in to lakhs of crores, the profits are high and costs become insignificant, thereby generating good returns for shareholders.
So even a boring bank providing plain vanilla accounts is a good bet. However, today all of them are getting computerized and modernized to control costs and drive efficiency. The future looks bright for bank as long as they dont mess up with NPAs
