Need help- Profitable sectors/business with absence of listed companies

Dear VP members

I need a help by tomorrow, need to confirm for a presentation in Oct 1st week. The topic is " why listed companies are absent in a profitable sector". When I check with the folks out there this was understanding given to me:

  • profitable business sectors with lesser entry barriers and regulations yet there is no listed companies.

Then accordingly I have to hole out the reasons for imbalance.

Perhaps there can be situation where private players dominating? Any sector in mind?

Amusement/theme park? Bollywood movies/cinema halls?

Scratching my head, help will be appreciated.

Thanks in advance.

In the Foods space (Chaat,Vaada pao, snacks, etc.) : Its an unorganized market where there is almost no entry barrier, lots of unorganized individual businesses yet there are few established players who are running the business for generations without any need for listing. This may be because of their conservative nature - they do not have aspirations to expand at national level and are happy with their regional presence, their business provides very good cash flows and hence, have no need of public money, more importantly they do not understand listing in stock markets and are happy the way business is being run with no disclosure accountability except for filing of taxes. (One of my friends has a family business of 70 years - runs several bakeries and few restaurants - very profitable yet would never think of listing it). The size of this market is huge and you will find niche segments too like in sweets you have Aggarwal sweets or Bengali sweets, in ice cream - Gianis, and many more business like that.

School books - this is a niche segment, and a profitable one yet there are no listed companies. There are a few foreign publishers in this space like oxford university press, macmillan, springer, etc. but I guess even they are mostly unlisted. The reason for not listing maybe that they don’t want to be seen making abnormal profits from Education.

Running educational institutions - a lot of wealth has been created in this space and yet you will not find them listed. Same reason - they don’t want to be seen making obscene profits out of sensitive thing like Education which would invite Government control.

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Adding to @Savishesh excellent post, some other factors could be
Indian system maturity to value companies: Makemytrip listed itself abroad but not in India despite then being profitable. Perhaps it felt that it would get premium valuations abroad with more listed companies in that space, and less effort to sell the India story

Sectors dependent on black money/regulatory arbitrage-Like for education/sensitive sectors, certain business models possibly which are heavily dependent on black money such as specialty hospitals(very few listed companies even now compared to the mass) or large cash transactions (like coaching classes, infra, education). As the collapse of Educomp, Everonn, Vasan Eyecare has shown, fragile business models in the unlisted space collapse, so listed space has less scope.

Large gestation period after which new management seeks listing to provide exit to PE funds: Quess is a classic case-India’s largest manpower services provider, which got listed only after its sale to Ajit Issac. Often, the first generation promoter of niche offline business models(gyms, low cost airlines) would have built up the business by bootstrapping, and would not need listing. So I’d think that exits are more a function of providing exits to funds than the sector per se.

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Thanks both with excellent perspectives. I think will go with food space
just due to available information, or that’s a wrong assumption? This is
purely basis I have gone through excellent research reports by management
consultants earlier.

Unless information is available may not help to build a case study, any
thoughts in choosing a specific idea which is backed by good amount of
information and analytics?

What I feel is that the best buisness usually require very little capital expenditure and investing in assets and are more dependent on the intangilble factors which in above mentioned examples are taste, food quality, good results in case of coaching classes etc.

As warren buffet said that even though another competitor can come in and may be ready to spend 10 times the money , but still wont be able to create the intangible value of these companies.

Also, Most of them are started by typical middle class indian people who are risk averse and specially so in case of buisness. hence they necessarily don’t seek outside investors ( outside of family, caste , geography etc. ) and are more likely to invest their savings back into the buisness and this also motivates them to utilise this invested money to the maximum.

All these factors make great buisnesses in india to be held privately.

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Dear @Alphin

Thanks for deep insight. This makes a lot of sense:
Value propositions are pretty straight forward i.e. quality, cost structures are lean (with little capex), distribution channels are flat (mostly personal networking, good will).

Though I need to explain is there a possibility of value migration from non listed to listed space e.g.

  • by replicating position/business prototype to a larger scalability
  • by moving a local habit to a structured competitive advantage
  • by differentiating customer needs to penetrate larger market
  • by partnering with similar forces
    If any yes to above what is the aspiration behind such promoter to do?

Or we conclude no they won’t go listing, remain like that.

Any thoughts? @Donald, any lead ideas?

Haldirams seems to be a good case study.

I maybe wrong but I have following view on these businesses:

First what is the Competitive advantage with these few unlisted businesses that even with negligible entry barriers and too many competitors they are able to outperform? Brand built across decades, consistency of their offering and human behavioral characteristic of again and again going to the same place which has been satisfying us for decades and sometimes generations.

Now other question is : Is listing required by them in the first place? Listing is required when we need public money to expand…but if these businesses expand to newer regions they have no competitive advantage of brand recognition, loyal customers and even difficult to replicate same quality of customer offering which is important so there is little incentive to expand to newer geographies.
For example, Sarvana Bhawan is there in many states in India and even in many middle east countries but their product quality is not exactly the same across. Same for Karims, Tunde kababs, etc. and hence they lose their charm and customer loyalty in newer regions. Same goes even for other business like schools.

Second, Listing brings its disadvantages like disclosures and most importantly pressure to perform. All these business have a long term orientation which will be affected by the pressure to perform if they do list on stock exchanges.

Coming to numbers: High positive operational cash flows, negative working capital and ability to transfer increase in cost of raw materials (pricing power) are dominant features of such businesses.