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Weekly Insights #7- How To Judge Moat Attacks?

One of the most common investment thesis or strategy is betting on companies that are either leaders or have some form of an edge (the so-called Moats).

For us as well, Leadership & Edge is one of the six key factors that we look for in evaluating a company’s growth catalyst & potential.

At the same time, Leadership & Edge is also one of the most common reasons (or say anti-thesis for a stock) to sell a stock. At the very first signs of heighten competition, a lot of investors sell a stock with a thesis that the company will face challenges on account of higher competition.

This has always puzzled me because if the original thesis itself was that the company has moats, which itself means that it is best placed to fight the competition; then why sell it under an impression that competitive pressure has increased?

In such cases, you have not bet on the company having some moats, you have actually bet on a situation wherein there is a lack of competition (which is not a true moat).

If one’s original judgement of the leadership & edge is correct, then one should have confidence in the company’s ability to withstand & fight the competition.

One should give some benefit of the doubt to these companies with leadership & edge, because the competition has to build moat while being at a disadvantageous position vs the leader who only has to protect the moat by being at an advantageous position. So the leader has a lot of leeway to guard & fight competition.

But having said that, heighten competition or moat attacks are indeed big risks for a company because more than the impact on actual business, it has major impact of the valuations that a company commands. There is a leadership premium that exists in the markets. So, if a company does actually loses its leadership & edge, there will be non-linear impact of growth slowdown + valuation de-rating.

And thus it is always important for investors to judge/evaluate such moat attacks.

One of the best ways to evaluate such moat attacks is to see what the leader (company with the edge/moat) is doing-

a. The companies that do not do anything and maintains status quo have the highest probability of getting disrupted and seeing their moat challenged.

b. Companies that respond to a moat attack have the highest probability to continue to retain their moat.

c. And then there are companies that in the face of a moat attack disrupts themselves and as a result, are not only able to retain their moat but are also able to expand their moats. These companies are true disruptors.

Broking Industry is a good example to understand this-

  • Zerodha when it launched in 2010 disrupted the broking industry. Most incumbents failed to respond to this disruption.

  • Then as Zerodha itself faced competition from new discount brokers, it disrupted itself by reducing the brokerage on cash segment to zero.

  • This way not only did Zerodha maintained its leadership, it further expanded it.

Laopala is another good example-

  • Laopala historically has been a clear leader in the Opalware space; it is a category that they created. However, in recent years new players like Borosil and Cello have entered the market.

  • The company has responded to new competition by expanding its capacity by >50% and expansion of distribution.

  • Further, the company has in-returned attacked the established leadership of these competitors by entering into Borosilicate glass space; wherein it will have a competitive advantage of own manufacturing vs competitors who import these products.

  • With successful execution on this new capacity and new Borosilicate space, Laopala will not only retain its existing leadership & edge, but will also further expand its leadership & edge over its existing & future competitors.

Asian Paints is another example of moat attack-

  • Asian Paints is facing heighten competitive pressure with new players like Grasim, JSW Paints etc entering the markets with substantial capacities.

  • In response, Asian Paints has announced substantial capex for backward integration in its paints business, as a result of which it expects 4-5% improvement in gross margins and that will allow it to better compete with new competition.

  • At the same time, Asian Paints has also announced a similar backward integration capex on white cement/putty business (Asian Paints is the 2nd largest player while Grasim being the market leader). With this backward integration, Asian Paints expects ~5% margin improvement, which is substantial in a low margin segment like Putty.

  • With these initiatives, Asian Paints is not only fighting to maintain its leadership in its core business of Paints, but it is also attacking the leadership of competitor like Grasim in their leadership products.

Diagnostic companies like Dr.Lal, Metropolis etc are also seeing their leadership challenged with a lot of new competitors coming in with discounted prices. Till now I have not seen these companies take any major initiative to tackle this and that could pose a serious risk to leadership of these companies.

Telecom is another example wherein Jio came out as a true disruptor with 4G and cheap pricing, it disrupted the business and thus became the clear leader in the industry.

In summary, whenever a company faces a moat attack, look for what the company is doing. Complacent companies will end up losing their leadership & edge, while true disruptors will end up further cementing their leadership & edge.

“Disrupt or get Disrupted”

That’s it for this week, new insight coming up next week. So stayed tuned!


Surge Capital is a trade/brand name used by Ankush Agrawal (Individual SEBI Registered Research Analyst INH000008941) to provide equity research services in the Indian Equity Markets.

“Registration granted by SEBI, and certification from NISM in no way guarantee performance of the Research Analyst or provide any assurance of returns to investors”

“Investments in securities market are subject to market risks. Read all the related documents carefully before investing.”

“The securities quoted are for illustration only and are not recommendatory”

Stock specific investment disclosure:

Asian Paints- No Investment. Not Traded in last 30 days. Not an active recommendation in Research Service.

Reliance- No Investment. Not Traded in last 30 days. Not an active recommendation in Research Service.

Dr. Lal Pathlabs- No Investment. Not Traded in last 30 days. Not an active recommendation in Research Service.

Metropolis- No Investment. Not Traded in last 30 days. Not an active recommendation in Research Service.

Laopala- No Investment. Not Traded in last 30 days. Not an active recommendation in Research Service.

Grasim- No Investment. Not Traded in last 30 days. Not an active recommendation in Research Service.

Borosil- No Investment. Not Traded in last 30 days. Not an active recommendation in Research Service.

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Enjoyed reading the piece of information. We observed these phenomenon in recent past in case of Nokia (Management reluctant to change) and also Blackberry. I am not sure about India, however, Maruti still not aggressively trying to enter EV market and it is loosing market share. Very interesting to watch this space. Many chemical companies also working on backward integration to reduce not only the cost but also dependency on supply chain. Great topic.

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