Coffee Can Portfolio - Investment Rationale
Updated: May 19, 2020
Part 1 - Page Industries, Nestle, Britannia
If you've forgotten, our coffee can portfolio consisted of the below allocation to Companies.
We could get ourselves deep into technical analysis and the numbers of it all. But in this post, we are focusing on the fundamentals and economic moat of the companies. (The term economic moat, popularized by Warren Buffett, refers to a business' ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share from competing firms.)
Let's dive right in, shall we?
Core Business: Page Industries is the largest franchisee holder of Jockey in the world. The relation between Jockey and Page is so strong that in 2010, Jockey extended their licensing agreement with Page for 20 years, instead of the standard practice of 5 years.
"The promoters historically know Jockey and Speedo in and out and understand the intricacies of the business, and that is one of the reasons why competitors have not succeeded against Page." Pius Thomas, Page’s executive director (finance) (Except from The Unusual Billionaires - Saurabh Mukherjea)
Page's business model also generates large amounts of cash, being an FMCG like business - sales are paid for in advance, while raw material supplies are paid over a period of time.
Competitive moat: Page's economic moat is simple - it's comfortable. It enjoys a brand recall that none of its competitors can match. We would bet that 7 out of 10 males reading this article in India are wearing Jockey underwear. It is already established that in a business such as underwear, if a customer accepts a particular style and brand, it is highly likely that he will stick to it.
Page's distribution strategy is unique too. For example, if you shop at Linking Road in Bandra (Mumbai), you can buy a Jockey product at a small hosiery store, at Jockey's own exclusive outlet and at Shoppers Stop mall - all within 1-2 km of each other. Each store reaches out to a different clientele and Jockey has covered a wider base than having just one of the three formats.
Coffee Can Portfolio:
Page Industries has an allocation of close to 17% in our Coffee Can Portfolio due to the above factors. We expect the Company to continue performing well and it's long term outlook looks positive considering the 20 year contract signed with Jockey USA.
Core Business: Nestle's products need no introduction so let's just name the big 3 - Maggi, KitKat and baby milk powder. Out of these, baby milk powder is key. Let's look into that.
Competitive moat: Nestle dominates the baby milk powder segment with 97% share in the market. A deep dive into the financials of Nestle reveals one more interesting bit - baby milk powder contributed to nearly 80% of the free cash flows of the company.
The milk powder segment is a huge cash cow that just cannot be usurped. Like Page, the FMCG model generates large amounts of cash and essentially a negative working capital cycle.
Why is that no one can compete with Nestle in the baby milk powder segment? Simple - In the late 90s, India changed the rules about how baby milk powder is classified - it is now considered a prescription drug (it was classified as an FMCG earlier).
What does that do?
Prescription drugs cannot be advertised - Abbott's Similac may be a better product. But Abbott cannot market it since advertisement is not allowed. No other new manufacturer can advertise its product to compete with Nestle and grab any market share.
No new licenses - The Government has stopped giving new licenses for baby milk powder. This is because the WHO has said that mother's milk is best for infants. Again, this means that no new manufacturers can enter the market.
Prescription drugs can be sold only at pharmacies - So baby milk powder cannot be sold at a Kirana store or Super market or similar. Baby milk powder is the highest margin product for a pharmacy. There is no bargaining from customers, no discount and only one supplier - Nestle.
A company such as Nestle will perform even in the most adverse of times. No Covid-19 can stop parents from feeding their children milk. Don't take our word for it - Nestle recorded 10.8% sales growth in Q4FY20 - when the Covid-19 stress was starting to accelerate. Expect decent growth even in Q1FY21.
Coffee Can Portfolio Nestle is a behemoth that deserves the ~15.5% allocation in our Coffee Can Portfolio. We expect the Company to continue performing well over the next decade and continue its monopoly over the baby milk powder business.
Core Business: Ting ting tiding. Britannia's biscuits dominate the premium category of biscuits in India.
Competitive moat: Like we said above, Britannia enjoys such immense brand recall in India that its essentially impossible to usurp it's dominance in the premium segment. In India, there's basically just 2 major biscuit manufacturers - Britannia in the premium segment and Parle in the lower segment.
With incomes increasing, and hopes of a more aspirational India, expect Britannia to gain an even wider audience as consumption behavior changes. Britannia has been able to generate a Return on Capital higher than its cost of capital for over a decade now.
Coffee Can Portfolio
Britannia takes 8.7% of our Coffee Can Portfolio. Don't expect customer tastes to change in the next decade when it comes to something as biscuits - It's going to be a Good Day!
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