Mudar Patherya: Playing the 'distribution' card

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I am taking a breather from recommending stocks; I am recommending a theme — “distribution”.

Over the past week, I met three companies — HSIL, Somany Ceramics and Raymond — who told me only companies with deep distribution capital would endure (they mentioned brand but in their second breath).

So, what is distribution capital? It is the ability to sell fastest, largest and at the lowest cost. My first reaction was big deal because this is what they would have been doing for years, so what could be different now. The difference is outsourcing. For decades, companies made and sold; today they sell and outsource/manufacture. The result: Product portfolios have widened, which needs to be marketed wider, deeper and quicker to service customers better.

I spent a fascinating morning hearing the Somany Ceramics story.  It is one reason I might still kick a frustrated hole in a stained glass window; I sold too soon, as the company emerged from enduring hibernation to appreciate from Rs 200 crore market capitalisation to Rs 2,700 crore today. I thought its appreciation would have been the predictable joint venture-driven value-creation story; the management corrected me. It was a new distribution strategy that made the difference.

This is how it panned out in Somany’s case: The scion of the promoter’s family did something unusual; he began to meet the trade, listen to their issues and understand shelf-space dynamics. The result was unexpected: The trade partner sitting in a remote location now knew he enjoyed the sunvaayi that extended right to the top; he began to stock more. And, now that the evangelising had extensively kickstarted, Somany began to manufacture/outsource a wider product range, replenish with speed, encourage dealers and retailers to stock less, and commission proprietary showrooms that would stimulate consumption (and leave the existing network to address the uptick). Products moved faster, cash inflows accelerated, debt declined, interest cover increased and capexes declined — all the value drivers kickstarted by that ‘D’ word.

Then, I met HSIL. In the past couple of years, the company has restructured its multi-decade business by creating three sales channels — building products, packaging and consumer products — through which all portfolio increments will now be addressed, enhancing organisational cross-sell synergy on the one hand, while enhancing dealer revenue on the other.

Then Raymond sealed it. It was India’s first organised sector textile retail brand; the company has virtually reinvented its distribution network in the past four years starting with store refurbishment (challenging, as no franchise wants to take an enforced shutdown), stronger brand alignment and spending, increased capital efficiency per dealer and then simply telling the rest of the trade how so and so is now making more money. The result: Business growth in the past three years has outperformed the sectoral average; this is one reinvention story on which I would place a sizeable bet for graduating into a higher league.

If we stock-pickers only walked round the corner and spoke to dealers and resellers more, it might be a more effective way of picking the next multi-bagger. The author is a stock market writer, tracking corporate earnings and investor psychology to gauge where markets are not headed


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