Thread by @Finalysis20

"Monopolies & Why invest in Monopolies?" a session by Saurabh Mukherjea, Founder & CIO of Marcellus Investment Managers @MarcellusInvest
hosted by Vivek Mashrani @MashraniVivek in
Investing Accelerator Summit @ias_summit
#IASummit

A 🧵

Developments of past 10 years:

Indian economy: Less Fragmented; More Integrated
~ National highway network: 2x
~ Broadband users: increased from 20 million to 687 million
~ Airline passenger traffic: Grew by 16% CAGR
~ Cloud & SaaS enable small companies to expand quickly

Result of the developments:

~ Well performing smaller players are taken over by larger established ones

~ Less relevant, technologically challenged smaller players go out of competition

~ Multinationals dominate

~ Well run multinationals ultimately become monopolies.

Impact of attack on black money

~ Killed local businesses, that didn't pay tax
~ PAT gained importance over PBT
~ Low/No tax evasion in real estate brought retail money to financial sector, reducing the cost of capital.
~ Well run market leaders benefited over small players.

Result of this development in numbers:

Share of 20 giant businesses in nation's profit:

2008-09 - 30%
Pre-covid - 60%
Post-covid - 90%

Historically:
Countries where formalization has happened the monopoly businesses have become stronger

What smart monopolist promoters do?

~ They don’t enter a sector in straight-forward way
~ They apply layer of difficulty in their business model e.g. collecting more data
~ This creates hurdles for competitors
~ Overtime they keep adding layers of difficulty
E.g. Bajaj finance

Example of how monopoly business operate

Asian Paints
Focused on hardest aspect: Efficient Distribution

Ensured:
~ Availability of quality paint
~ In local shops near to consumers
~ In least possible time

Developed niche & over the years captured entire home building sector

Creation, execution & existence of monopolies is explained in
Peter Thiel's "Monopoly Model"

~ Identify a narrow unserved market
~ Build ur team & market with less competition
~ Capture this market comprehensively
~ Build barriers to entry
~ Move outward in concentric circles

7 things to do to build a monopoly:

~ The Secret
~ The technology/process: Tech should 10x better than peers
~ Timing
~ Monopoly in the niche market instead of moving everywhere
~ Data
~ Distribution/Sales
~ Barriers to entry

Bajaj Finance Case Study:

"If you gonna lend money more efficiently and more proportionately, then you need to have more data."
~ 2010-11: Data collection began
~ 2012: Insight analysis

Insights from the data collected:

~ High risk market: Banks were reluctant to lend,
~ Exists a class of borrowers that are low risk e.g. Doctors and dentists.
~ Targeted them with lower rates & created large market share.

Bajaj Finance's Data driven lending

Stratified data of doctors as follows:

~ From large or small med school
~ Oncologist or generalist
~ In metro city or small city

Peers:
~ Higher rates due to lack of data
~ Lent to poor quality borrowers leaving good ones to Bajaj Finance.

Bajaj Finance's increased layers of challenge

1. Provide EMI option (e.g. fridge purchase) & gather data
2. Instant loans (within 2 minutes) based on data
3. Access best borrowers & cross-sell without intermediaries
4. App to suggest products & offers customized to user's taste.

Casestudy: Lal Path Lab

~ Software: Collect data
Result: 2x footfalls/collection centre w.r.t. peers

~ SAP: Manage huge inventory for multiple tests
Result: Negotiated supplier rates

~ Pay vendors later; Customer pays first
Result: 0 receivable days; -ve working capital cycle

Lal Path Labs increased layer of complexity:
~ Started home collection to address demand spike pre & post office hours
Result:
~ High revenue/lab
~ High fixed asset turnover
~ 3-4x more cash generation than peers
~ Expansion: by providing backend to established brands

Investing in startups:

You have to back the individual because there is no result history.
The individual or promoter should have:
~ High intelligence
~ High energy
~ High integrity
Basically you have to judge a character rather than the business model.

On Valuation:
~ Valuation is not just spreadsheet & numbers
~ Value the persistence of the status quo.

Don't Ask:
How much is the P/E ratio?
Ask:
Is there sustainability of cash flow compounding?

Market share has nothing to do with monopoly!

There are businesses with 50-60% market share but don't make any money.

Ensure:
~ Barrier to entry
~ PAT share
~ Cash flow generation
~ Compounding of the free cash flow

Book recommendations

Read the following books by Saurabh Mukherjea ⬇️

To understand monopoly:
~ Diamonds in dust
~ Unusual billionaires

To train your mind:
~ Victory project

To learn investing:
~Coffee can investing

Secret to be a good investor:

Read last 10 yrs Annual Reports!

Check:
~ Is ROCE maintained?

~ Is working capital cycle improving?

~ Is company disrupting market by launching new product/service every 3-4yrs?

~ Are board members internal recruits or headhunted from outside?

What should be an investor's goal?

~ Ensure business monopoly before investing

~ Ensure 50% of the companies selected are right

~ Don't disturb compounding by trading in & out

~ Be patient & hold to let the company deliver results!

If you found this thread informative, let us spread this for the benefit of the investing fraternity.

Re-tweet the first tweet in the thread (Link 👇👇)

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