Spending on factories doesn't guarantee a big market share: Saurabh Mukherjea's Marcellus on Grasim's entry

Saurabh Mukherjea, founder of Marcellus Investment Managers

Marcellus Investment Managers believes that its ‘consistent compounders’, the likes of Asian Paints, Divi's, Bajaj Finance, will continue to maintain their dominance in the market amid heightened competition on the back of strong moats. Even with the threat of Grasim's big bang entry into paints segment looming large, star fund manager Saurabh Mukherjea is certain that Asian Paints will hold on to its market share.

A note by Marcellus says that companies which are able to demonstrate the ability of strong moats over decades are the ones that have built and continuously strengthened their competitive positioning against its peers. While on the surface it may appear that a new competitor poses a credible threat to the market leader, making a judgment about this without really understanding how strong the leading company's moat is can be very risky.

The note gives an example of a new IPL cricket team, backed by a wealthy owner, would pose a challenge to the champions who have dominated the league consistently over several years. However, it is difficult for the new team to defeat the leaders as the team needs brilliance and something more than just a large balance sheet.

Talking about Asian Paints it says that the company’s moat comes from its paint dealers. Asian Paints has close relationship with paint dealers who make money by selling the company’s products because of its efficient logistics system. While it may appear that a new entrant can easily persuade a paint dealer to push its products through higher margins, such a strategy is unlikely to work without adversely impacting the new entrant’s financial position. “The win-win solutions adopted by the likes of Asian Paints takes decades to establish and unless the incumbent grows lethargic, such an incumbent is incredibly difficult to dislodge,” as per the note.

In the context of Grasim’s entry in the paint industry, Marcellus says that spending money on factories doesn't necessarily guarantee sales or a big market share. If it was the case, multi-national paint players in India – who were never short of money to invest in creating capacities – would also be market leaders, said the note. While other paint companies are building capacities, Asian Paints has doubled its reach in rural areas and invested in making their paint cheaper.

Talking about Divi’s Laboratories it said that the company has three strengths. The company is 100 percent IP compliant. It is a non-competing service provider to its clients which are the world’s largest pharma companies, and it has a high-quality manufacturing process which also scores highly on regulatory compliance

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