When you start reading a book by Saurabh Mukherjea, you know what to expect. You get good insights into investing and—considering his name means a lot in the stock market—you know you are on the right track. His latest book, The Unusual Billionaires, is a misnomer, as it does not give you the names of such persons. Instead, it talks of seven companies on which you can bet your money and not regret. Hence, the billionaires are companies and not individuals. The seven chosen companies are Asian Paints, Berger Paints, Marico, HDFC Bank, Axis Bank, Page Industries and Astral Poly. ITC is also a part of this coveted group, but has not been covered extensively by the author.
So how does Mukherjea choose these companies? There are certain qualitative and quantitative parameters used for the evaluation. The result, as might be expected, can be judged on the basis of movement in the share price vis-à-vis the Sensex, which is fair enough. The quantitative rule followed is that for non-banks, growth in sales should be above 10% in each of the past 10 years without a break. Further, the return on capital should be 15% for the same period. If there is a break, the company gets excluded. This is called the ‘coffee can’ portfolio (CCP). The term ‘coffee can’ is borrowed from the Wild West—Americans saved their money in a coffee can and never opened it. The idea is to pick up stocks and keep the portfolio unchanged for a prolonged period of time and then evaluate your gain. In case of banks, the equivalent parameters would be growth in loan book and return on equity.
The author gets into detailed analysis of these seven companies, going through their foundation, promoters, products, strategies over the years, etc. There are several similar threads in these stories. Some of these commonalities revolve around a focused approach to business, which means not getting into unrelated diversification—this is what several companies do and fail. When unrelated diversification happens, shareholder value gets affected—not a good development.
Having good relations with customers and bonding with them is something obvious, but the way some companies have gone around in keeping good relations with distributors, as well as strengthening the supply chains, makes them stand out, and this gets reflected in the share value at the end of the day.
The stories of these companies are eminently readable and take us through their history, involving various people who built these organisations. There is also some talk about CEOs and MDs who made a difference to these organisations. Marico sticking to Parachute oil and Page Industries never giving discounts on premium-wear are some points that build the respective brands and are highlighted by the author. There are several such remarkable strategies and policies of these companies that have been listed by the author.
How does Mukherjea put these ideas together? He directs us to three areas. First is the focus on long-term strategy without getting distracted in the short term. The second is, what he calls, ‘widening the moat’ around the core franchise. This is what makes the product unique, distinguishable and respected. Use of technology and proper use of talent are ways through which this is done, leading to improvement in efficiency and cost control. This also helps one face competition—a message for promoter-driven companies is that they should strive to keep the management professional or else the rot will set in gradually. The third message is sensible ‘cash allocation’. Here, the author pitches for surplus cash to be given back to shareholders, rather than being used for diversification just for the sake of doing so. While this guidance does sound commonsensical, it is surprising that it’s not followed by most companies, which tend to get carried away by short-term temptations.
In his typical style, Mukherjea also rounds up the book with a checklist for long-term investors. Here, some points do read like those presented in his earlier book, Gurus of Chaos, but fit in well mainly because they make a lot of sense. The attractiveness of any company is summarised by these tenets: if business is dependent on government regulation, stay away; judge the competitive position of the company before investing; the overall size of the industry and growth potential are important, as they explain future prospects; higher capital-intensity might spell trouble, as linkage with the economic cycle has its ups and downs. Finally, ask if excess returns are being generated and if the CCP principle can be used.
Next, the author emphasises management quality, something which we overlook. Here, he is particular of the quality of accounts and whether the promoter has political contacts. The issue of focus on business and dealing with capital allocation is all the more important when evaluating management quality.
Last, Mukherjea highlights the competitive advantage of the company, which is important, as no unit can be looked at in isolation. Companies that are innovative, score higher than those which are more intransigent. The brand value is important and, the author says, one good indicator is to see how much the company spends on advertising and publicity. The financial ratios under CCP can be compared with those of others in the same industry to draw comparisons.
One factor that Mukherjea keeps reiterating throughout the book is the strength of the architecture of the company. This is nothing but relations with employees, customers and suppliers—what we also largely call stakeholder value, which goes one step beyond shareholders. Work culture and freedom in operations are some factors that come to mind here.
Mukherjea’s book is insightful and makes for easy reading. We can identify with the stories and also use his tips for taking investment decisions. But, as he says in the beginning, it has to be like the coffee can, where we do not switch or change the composition of the portfolio once we have made the right choices. This advice is good, and it is left to the reader to form their own coffee cans, with his list being an illustrative one.