“A good business is like a strong castle with a deep moat around it. I want sharks in the moat. I want it untouchable” – Warren Buffett.
You might be wondering what the word “Moat” even means! Well, in the medieval age, a castle had a wide ditch that was very deep and filled with water intended as a defence technique to protect the castle. This ditch is called a “MOAT”.
Similarly, in business, it refers to a company’s ability to ensure sustained profits by maintaining its competitive advantage over its peers. The wider the moat, the stronger the business. Now that we know what moats are, let's discuss why they are important.
Why is an Economic Moat Important?
A business with a competitive advantage over its peers will always create more wealth for its owner than the one that doesn’t. Why does this happen? Simple! The better the business, the more time it takes for other players to destroy any company’s business strategy and gain market share and customers. That makes having a moat so essential.
Have you wondered if there are any moated businesses in the Indian industry? Well, we are all prepped up to answer you with examples of businesses that we think have super-duper moats.
Toh chaliye shuru karte hai!! :)
Indian Railway Catering and Tourism Corp is an e-ticketing and catering company. It has a 100% monopoly when it comes to the rail network. Whether you use Paytm, G-Pay, or any other app, you are ultimately redirected to IRCTC to book your e-tickets. Superpowers, much?
With increasing digitization, the number of e-ticket bookings has increased drastically. After all, who would want to slog in lengthy queues when booking tickets can be done with just a few clicks!
Along with e-ticket booking, IRCTC is the only entity authorised to manage catering services on trains and major static units at railway stations. These are 2 major businesses where IRCTC has its 100% monopoly. The government hasn’t yet allowed any other company to serve the need of booking tickets online. Until this happens, you can be assured that IRCTC is a widely moated business.
Moreover, the company's earnings grew at an astonishing growth rate of 28% from 2016 to 2020. And the cherry on the cake, IRCTC is a debt-free company! That’s the prime reason why the company's IPO was insanely oversubscribed.
Central Depository Services Limited (CDSL) is the only listed depository in India and a key beneficiary of structural growth in capital markets. There are only two depositories in India, NSDL and CDSL.
A depository provides you with a Demat account and is like a storehouse of shares. It keeps track of Demat accounts and their shareholders and also enables securities transactions. It generates income from annual issuer charges, transaction charges, IPO/corporate activity charges, etc.
Currently, only 4% of Indians hold Demat accounts compared to developed markets of the USA where 48% have a Demat account. Do you think the number of Demat accounts in India will rise as time passes? If yes, then who is sure to benefit?
Since only CDSL and NSDL have licenses to be the depository, this imposes a barrier to entry for other businesses. To give you a rough idea, new Demat account additions rose to an all-time high of 10.7 million between April 2020 and January 2021.
Indian Energy Exchange (IEX) is a nodal power exchange in India. You may have traded shares or commodities or currencies or even crypto, but did you know it is possible to trade electricity as well? Yeah, you heard it right! You can trade electricity in IEX! The IEX accounts for 95% of the short-term electricity contracts (i.e., contracts less than 1 year) traded over exchanges in India.
IEX doesn’t produce or consume electricity but is just a platform that makes sure that a buyer meets a seller. The more buyers on a single platform, the more sellers would be attracted to it and vice versa. This is called the Network Effect--a type of moat that IEX has. More participants mean more efficiency, better price discovery, and the moat gets deeper.
4. Info Edge
You may not know Info Edge, but you must be well aware of the job search platform naukri.com, the marriage search platform jeevansathi.com and the property search platform 99acres.com. These are all owned by Info Edge!
Info Edge even has stakes in Zomato. And what makes it a moated business is the Network Effect -- the one like in the case of IEX!
Just imagine, if most of the recruiters are listed on naukri.com, where would you get the chance to get the right job profile? So, naukri.com serves as a platform for both sides of the party. Not just this, Info-edge is now looked upon as an investment company that has the knack to foresee great internet businesses and invest in them. That's why this business is highly valued on Dalal street.
5. Avenue Supermarts
Confused with the name? Well, you may have shopped at D-mart several times. It is listed as Avenue Supermarts on the stock exchange. Have you ever thought about why people go to D-mart? Maybe because it's a one-stop solution for everything you need in your household, or maybe because of the unbelievably low prices.
Well, D-mart uses EDLP, i.e., Everyday Low Pricing Strategy, which means you get everything at a low price every day. But how does D-mart manage to give out products at such low costs and even manage inventories? Do check out our blog on D-mart to know all about it.
You would be surprised to know that D-mart still makes huge profits, and none of its stores has ever closed to date. Before starting D-mart, Mr. Radhakishan Damani went to the USA and studied the business model of Walmart. That’s where the business plan came from.
Currently, D-mart operates 238 stores across 11 states. So, if they can operate in other 18 states as well, think about the business opportunity this company has!
These were some of the moated businesses that we could think of. Other honorary mentions which couldn’t make it to the top 5 are Maruti Suzuki, Interglobe Aviation, Titan, Dr Lal Pathlabs, and Bajaj Finance.
If you guys wish to know more about the different types of moats a business has, let us know in the comment section, and we’ll cover them in our future blogs. Also, if you think you have found a deep moated business, share the stock’s name and your story about why that business is a moated one.
Share this blog with someone who always gets confused about finding the businesses with the best economic moats.
That’s all for today! Happy Learning :)
*Disclaimer: The stocks discussed above aren't recommendations from Finology; they are only picked to make you understand the concept.