saurabh mukherjea: Invest in master franchises as inflation sets in,

It has been an interesting earning season so far. While demand seems to be surprising everybody on the upside, the impact of high commodity pricing is something which has been felt by best of the franchise like Asian Paints and Pidilite. How should one understand this scenario, strong demand but low margins?
As far back as November, December last, we had said that this was a highly likely event and that demand would come roaring back post Covid and there would be input cost inflation the world over. This is not just unique to India, this is a global challenge and in such a circumstance, you have to be invested in champion franchises, market leaders, consistent compounders, master franchises — whatever you call them.

That strategy is working nicely for us. So whether it is Asian Paints, Pidilite, Page Industries, or Titan — all of these are part of our consistent compounder portfolio. They are pulling away radical amounts of market share. We are seeing 30-40% volume growth from the master franchises. We have got the first half operating margin down year on year but I do not think we should lose too much sleep about that. What are you focusing on? What you are benefitting from is the consolidation of massive industries in favour of one or two companies and that is the theme we will see the rest of the year.

One day, commodity price inflation will abate but by then, the master franchises would have locked in so much market share. And the interesting thing is that the online leaders, firms like Nykaa are doing exactly that, but in the online context. In the offline world, Asian Paints and Pidilite have been doing a similar job. The consolidating markets for decades and that is why we like them and I reckon this theme will continue. The consolidation of the Indian economy with every sector consolidating into the hands of one or two companies will continue and hence the focus will be on staying with master franchises, with consistent compounders.

The entire uptick in commodity prices and the pricing pressure which Asian Paints, Pidilite and Havells have gone through, has not shaken your thesis. You still believe that the only way your firm would be investing is to concentrate on these good companies which have brand, distribution and which are gaining market share in this tough time.
Absolutely and that argument is becoming easier to make. Let us take Pidilite results as a case in point. I do not think any of us will say that demand for adhesives or waterproofing will abate given that we have got real estate and building materials recovery underway. So adhesives and waterproofing is required. Now which company has dealt with the input cost pressures the best? Ask any analyst, any…