Sticky Wicket
It takes a certain kind of hubris to be a retail investor in the stock market. In the short term, the market is a zero-sum game: your loss is someone else’s gain. Usually, that someone else is a Goliath- mutual funds, hedge funds, high frequency traders, scalpers, market makers, someone with God-level resources and training. And you, David, have to contend with all these baddies. Plus rent, EMI’s, groceries and the general mental and financial overheads of living.
To still have faith in one’s own stock picking, timing and position sizing against those odds is admirable. Stupid, but admirable. But there’s a reason David vs Goliath resonates. It’s exhilarating to witness the underdog win. Even if it happens rarely.
It’s often posited by folks like Ian Cassel that it is a winning strategy for retail investors to focus on smaller companies – those that haven’t caught the eye of the market sharks yet. If you’re willing to dig deep enough, the narrative goes, you’ll find something in the company that the market is overlooking and not pricing in yet. Besides, none of the sharks are going to waste resources kicking up such tiny pebbles.
While this is true, I think there’s another, more emotional reason retail investors like myself gravitate towards the minnows. There’s usually a story, a simple and easy-to-understand business model. But more than that, its the people. The management seems accessible. Their journey, struggles and optimism are infectious. You want to root for them, cheer them on. And, sure, make some money along the way.
And so you’re ok to look past minor transgressions. Or at the very least, be more forgiving. But we’ll get to that.
First, consider a market where one brand has 70% market share, decades-long customer loyalty, multiple award winning advertisements and enough cash reserves to obliterate any newcomers. Oh, and the brand name is pretty much the generic term for the product. Imagine choosing to fight against that.
Enter: Jyoti Resins & Adhesives Ltd. A manufacturer of synthetic resin adhesives, the company makes various types of wood adhesives (white glue), under the brand name EURO 7000. Now, admit it, when you read “white glue”, this is what you pictured:
Fighting against that, how, in 15 years, did EURO 7000 achieve a reported 15% market share?1 Slowly, painfully, one store, one carpenter at a time.
The Indian furniture industry is fascinating. Unlike in the West, mass produced flat-pack IKEA style furniture isn’t the norm here. We prefer bespoke, hand made stuff made on site from scratch. In weeks, a skilled carpenter will transform sheets of plywood into virtually any design you can throw at him. The surface is finished with laminate or similar, and takes copious amounts of white glue.
For the other materials, the carpenter may nudge the client one way or another. But white glue? Fevicol is the only choice, picked by the client and used without a second thought by the carpenter. In fact, it’s one of the few products in a hardware store that has almost universal brand recognition. That’s a tough cycle for a new entrant to break.
The first instinct would be to fight on price. Be nimbler, keep costs low. But Pidilite (Fevicol’s parent) has such staggering economies of scale and brand recognition that this is a nonstarter. Quality? Good luck with that. Pidilite has a multi decade lead in understanding the raw materials and manufacturing process, which hasn’t really changed all that much. Availability? Fevicol is already available in every nook and cranny of the country.
How, then?
Like the pharma industry, in the furniture business too there is an agency conflict. The doctor decides the medicine, but the patient pays for it. Similarly, here the carpenter/designer recommends materials but the client foots the bill. And unlike pharma, there is no carpenter’s guild or government body that forbids incentives, kickbacks or commissions.
You can see where this is going. The company offers a full-fledged carpenter rewards program2, quite like airlines offer miles. Every purchase by the client earns the carpenter referral points. These can be redeemed against various gifts, from inexpensive tools to scooters or even a car! As of the last earnings call, the company has made provisions of ₹89 crores for such redemptions. To put that in perspective, as of today, the market values the entire company at ₹1780 crores.
That’s ₹89 crores worth of float that the company gets to collect interest on, or even invest once it knows the redemption pattern well [EDIT - See footnote]3. Reminds me of Starbucks. Scary, given management’s past run-ins with regulators and subsequent sanctions.
Presumably, this rewards program isn’t publicised in stores. I wonder how clients would feel about being the only unwitting participant here, if they found out. Perhaps they’ll appreciate kickbacks being out in the open. There’s always the niggling suspicion that already colours every client-carpenter interaction.
Clearly, the strategy has worked for the company though.
Another quirk of small companies is that earnings calls are full of surprises.
In the most recent one, a caller simply wanted to know where she could buy the product online. Not as an investor conducting research, but just a regular buyer who took the trouble to plug in on a scheduled concall, joined the queue, waited her turn and asked the MD and COO something that should’ve reached a customer care desk. It was a learning experience though- EURO 7000 isn’t sold on any e-commerce channels! Understandable, given their strategy targets carpenters, not clients.
Also, with small companies, the job of transcribing earnings calls probably goes to some intern. And thus you get gems like this:
If that doesn’t make sense to you, it didn’t to me either. So I went and listened to the call itself. They’re talking in Hindi, and using an expression “Mota-Mota”, which loosely translates to “approximately”. Or, you know, literally becomes “fatter-fatter”. Show me a large cap earnings call that’ll make you chuckle like that.
But anyways, back to Jyoti Resins and EURO 7000. Where will they go from here? Will they continue their fight as the scrappy underdog? Will Pidilite swat them away? Will they lose their way to the twin sirens of share price and unredeemed points’ float? Or will a new challenger emerge?
I don’t know the answers to any of those things. But whether you’re rooting for them or not, aren’t you invested in their journey already? That’s the beauty of small companies. You’ll probably underperform the market, and may even lose your entire investment when one or the other goes bust. But one thing you can know for sure: an interesting ride is guaranteed.
This post, and any analysis I’ve offered, is not investing (or life) advice. It is just my personal opinion as an avid market participant. I may hold positions in the securities discussed. Do your own due diligence. Don’t depend on random newsletters from internet strangers to make portfolio decisions.
This 15% percent figure is often repeated by management, but I haven’t found any independent source for it yet. Caveat Emptor!
In fairness, Pidilite runs a similar program too, called the Fevicol Champions Club. I doubt it forms as big a part of their core strategy though.
As an astute reader pointed out, there is a difference between Jyoti’s float and Starbucks’. Starbucks is earning an income on advances received from customers. Jyoti gets to defer its promotional expenses in terms of pay outs to carpenters. Subtle, but important distinction.
Fatter-Fatter Figures, ftw.