Which new-age stocks have deep Moats? Saurabh Mukherjea of Marcellus PMS Fund explains

Discussion in 'Must-Read Interviews, Articles & News Items' started by Arjun, Jun 8, 2022.

  1. Arjun

    Arjun Chief Executive Officer (CEO) Staff Member

    Mar 19, 2015
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    Which new-age stocks have deep Moats? Saurabh Mukherjea of Marcellus PMS Fund is renowned for his mastery in identifying Moats in old-age stocks. He has now turned his attention to the newly listed new-age stocks and identified their moats & competitive strengths.

    It is well known that companies must have "Moats" which prevent competitors from barging into the market place and enticing customers away. Otherwise, the Company will lose its competitive edge and will not be able to churn out high earnings and Free Cash Flows which will lead to a slump in the stock price.

    In the past, Saurabh Mukherjea has rightly advised us to invest in old-age stocks such as HDFC Bank, Asian Paints, Pidilite, Bajaj Finance etc on the premise that these companies have an "impenetrable moat" in the form of technology, brand image, supply chain etc which gives them a virtual monopoly in the market place. We have reaped rich dividends by acting on this advice.

    As regards the newly listed new-age stocks, Saurabh's ace team gave a clean chit to Nykaa which manufactures branded cosmetic products.

    Nykaa is a rare example of an internet business that is deeply moated,” his collegue in the investment team of Marcellus Investment Managers stated in an interview to ET.

    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, it was advised.

    However, the other new-age stocks such as PayTM, Policybazaar, CarTrade, Zomato, Delhivery etc did not get the same endorsement from the expert.

    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 expert stated.

    The Marcellus expert opined that the strategy of the new-age companies of acquiring customers at exorbitant cost on the assumption that capturing market share will lead to profitability is a fallacy.

    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,” it was observed.

    It was also noted customers come over only because they are induced to do so by the monetary incentive but they have no loyalty to the platform. “This means that each additional customer does not necessarily translate into a future revenue stream,” it is tersely stated.

    The expert pinned down Zomato as an example of a company without a strong moat. It is described as having a “modest moat" and as being representative of most ‘platform’ businesses that are being built in India.

    This advice is quite valuable and will have to be borne in mind by us when we go scouting to buy the new age stocks.
    Last edited: Jun 8, 2022