Quantitative Quest for Great Companies

Debashis Basu 20 August 2016

Books that are able to describe successful businesses through a common theme or analytical framework are rare in India. This one (The Unusual Billionaires; Saurabh Mukherjea; Penguin Random House India, Rs499; 445 Pages) is an addition to that small collection. It uses the John Kay’s famous IBAS framework (Innovation, Brands/Reputation, Architecture, Strategic Assets) to explain the success stories of seven companies: Asian Paints, Astral Poly, Berger Paints, Marico, Page Industries, Axis Bank and HDFC Bank. Why these seven? Mukherjea, who is the CEO of institutional equities for broking firm Ambit Capital, and has studied under Kay, a professor of economics at the London School of Economics, has applied a quantitative process to select great companies.

The process involved three steps. In step 1, Mukherjea and his team at Ambit created the basic set of companies to study. He limited himself to companies with at least Rs100 crore of market-cap. This surprisingly low barrier yielded a list of 1,500 companies. Step 2 was defining the time period. Great companies should be around for years. Here, Mukherjea chose a period of 10 years which is surprisingly short. Step 3 was defining superior financial performance as revenue growth of 10% and 15% return on capital employed (RoCE) for every year for the past 10 years. RoCE can’t be applied on financial firms and so, for them, Mukherjea used return on equity (RoE) of 15% and loan growth of 15% every year. Only eight companies have managed to fulfil both the growth and return criteria in each of the past 10 years, the eighth one being ITC (apart from the seven I mentioned earlier).

Having identified these eight, Mukherjea has then told their stories. (Inexplicably, Mukherjea did not discuss ITC at all. Maybe, he did not get access to them.) What is behind the seven decades of continuous excellence of Asian Paints? How has Berger Paints done so well ever since the unassuming Dhingra brothers (now among the 50 richest Indians) bought the controlling shares in 1991? How has Marico, which still gets most of revenues from a commodity product (coconut oil), been such an outstanding performer? Mukherjea tells their stories. That apart, the book has sections on the IBAS framework, more detailed explanations of long-term portfolio called Coffee Can portfolio (a buy and forget approach) and a chapter on checklist for long-term investors.

Comments