Which listed new age company has the biggest moat? Saurabh Mukherjea’s team answers

NEW DELHI: In the past couple of years, we have seen a number of startups mature into listed companies. , Policybazaar, Nykaa, CarTrade, Zomato, Delhivery – almost all of them have business models that are tech-based and are consumer-facing.

However, the Street has been divided over investing in these names. Some believe they have the capabilities of becoming some of the biggest companies in India, while others believe there is no value in them.

Amid the heated debate, what many of the value investors and analysts have tried to find in them is a moat – perhaps one of the favourite concepts of Warren Buffett, who is arguably the most successful investor the world has ever seen.

For the uninitiated, anything that makes a company’s business harder to disrupt or imitate is a competitive advantage or ‘moat’. For a corporation to flourish, the presence of one or more such moats is an imperative. Otherwise, new entrants could keep entering the industry and drive down the incumbents’ share of the profit pie.

So, which of these companies enjoy the biggest moat?

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“Nykaa is a rare example of an internet business that is deeply moated,” said a member of the investment team of Marcellus Investment Managers, which has been founded by celebrated fund manager Saurabh Mukherjea.

Nykaa, which is owned by the listed entity FSN E-Commerce Ventures, is a dedicated marketplace that caters to the beauty, cosmetic and fashion needs of its consumers. Along with selling products from popular brands, it also sells its own products – which makes it a bit different from others, helping it carve a niche identity.

“In stark contrast, the majority of today’s startups have only a couple of moats (at best) working in their favour. As the strength of these moats is not enough to prevent new entrants from prospering as well, the game often reduces to ‘capital as a moat’,” the fund manager adds.

Almost all tech-based consumer-facing startups have spent exorbitant sums of money in the name of acquiring customers. This strategy – fueled by the glut of capital readily available – involves capturing market share by any means possible and worrying about profitability last. The assumption is that profits will follow post-market consolidation.

Marcellus says it is a fallacy. It states two reasons – lack of complexity and failure to retain customers.

“Most platforms simply connect buyers to suppliers – there is nothing that stops another company from catering to those specific buyers/suppliers… companies that have some element of complexity involved (usually some offline component, or proprietary technology) are better positioned because mimicking them would require significant investment,” says the money manager.

Moreover, since most of them are replaceable – customers have no incentive to stick with a specific platform and consequently exhibit little loyalty. “This means that each additional customer does not necessarily translate into a future revenue stream,” says Marcellus.

One such example the fund house cites is Zomato whose “more modest moats (in comparison to Nykaa) are representative of most ‘platform’ businesses that are being built in India.”

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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