How to improve the S-curve?

In our previous story, we learnt about the factors that restrict the longevity of growth for a business. Here, we will see the factors that boost the S-curves for businesses.

How great companies boost their overall S-curves
Several of Marcellus' CCP portfolio companies have historically delivered exceptional longevity in their S-curves without undergoing fade in their growth rates, for example, six to eight decades of consistent growth for Asian Paints, Berger and Pidilite; and two-three decades of growth for HDFC Bank, Titan and Page Industries. We expect significant longevity of our portfolio companies in future due to the following factors:
Polarisation of the Indian economy: Various industries in India are undergoing consolidation of market shares due to rapid networking of the Indian economy, improving availability of technology to drive scalability, government initiatives such as GST introduction and black-swan events like the COVID-19 pandemic. These factors help increase the slope of the S-curve for CCP companies by enabling faster market-share gains from both unorganised as well as organised competitors.

Company-specific factors:

• Strong pricing power avoids limitations to growth posed by competitive forces and hence increases the height of the S-curves for their businesses.
• Superior operating efficiencies using technology, systems and processes not only increase the slope of the S-curves (i.e., drive faster rate of cash generation) but also generate cash flows for consistent reinvestments into newer S-curves to the overall business.
• Prudent capital allocation to consistently add new S-curves: Consistent deepening of moats, addition of new revenue-growth drivers and radical disruption of the industry (rather than waiting for a competitor to drive the disruption). Our lethargy tests proactively aim to understand how our portfolio companies are deepening their competitive advantages, strengthening ties with various stakeholders and refreshing their offerings so as to leave no room for a competitor to take away market share through such actions.

Management quality and succession planning: All businesses face the event of succession of key management personnel, whether they be promoters or professionals. However, succession planning is a process that is not adequately ingrained in the DNA of most organisations due to the variety of challenges. As a result, many great businesses with strong competitive advantages fail to sustain in the long run. Our proprietary succession-planning framework assesses all our portfolio companies around parameters such as the decentralisation of power, the relevance of independent directors on the board, and the grooming and empowerment of high-quality CXOs in the organisation. This assessment is one of the key inputs which drive our conviction around the longevity of a franchise.

Read more about this in the September 1, 2020 newsletter (https://bit.ly/3mrSYVL).

There is more to the story:

The power of the S-curve

S-curves: Investment implications