If Ralph can employ incremental funds at good returns, it pays him to do so: His bonus increases when earnings on additional capital exceed a meaningful hurdle charge. But, It’s quite fascinating to see what some of them are doing or rather focusing on when compared to relaxo:1). Isnt the business Capex intensive? Yes, the FCF as reported in the balance sheet is negative, and that will generally be true for a rapidly growing company that has its own factories and is also creating supply chain infrastructure for a significant transformation in business, etc. I am also Managing Partner at ValueQuest Capital LLP— an invest advisory boutique which helps its clients invest their capital in good quality businesses. Typen Fähigkeiten; Immunität, Speckschicht, Völlerei: Basiswerte; KP 160. Liberty is focusing on getting the mall crowd and is positioning its shops next to the likes of nike, puma, pavers England, etc it’s is also now selling sanitary ware, competing with the likes of cera, roca, etc.4). For them, is distribution the moat (I think so) or is it more of brand recall?Quite a valid observation Abhishek. I agree with your part on the moat for relaxo – but a lot of moats do not get transgressed by competitors but are disfigured by slow moving forces of nature – for eg., natural juices eating coke’s moat slowly, SaaS companies eating into infosys/TCS. Thank you once again. The consequence of this two- way arrangement is that it pays Ralph – and pays him well – to send to Omaha any cash he can’t advantageously use in his business”Also see Mr Buffett’s essay titled “Businesses – The Great, the Good and the Gruesome” in his letter in Berkshire’s FY07 annual report.Overall I think it’s ok to look at either of two types of businesses- (1) capital intensive, high sustainable ROE with excellent growth prospects (businesses where you have to put up more to earn more but at incremental rates which are enticing); and (2) non capital intensive, high ROE businesses which have the ability to grow without requiring much incremental capital, provided there is no unnecessary hoarding of cash on balance sheet.And, its quite important to avoid those highly capital intensive, growing but having low incremental ROE businesses.That’s just the business screen. At the minimum, the comparison will show that the Relaxo strategy (of largely manufacturing its products, using mostly multi-brand outlets not owned by it for distribution, and spending significant money on brand ambassadors) is not the only successful strategy to operate in the Indian footwear market. Essentially replacement demand is not guaranteed. I learnt this lesson the hard way (in other situations) and as Munger says you don’t have to pee on an electric fence to learn not to do it. Because most companies (Relaxo included) treats loans and advances as a working capital item, you see this effect. If entirely equity funded, and assuming a tax rate of 34%, this would result in post-tax ROE of 13.5% and 14% respectively. But, with most of the distribution chain willing to pay in advance for relaxo’s products, I’d assume Relaxo to have some brand power, which would mean some pricing power as well. The proceedings are going on before appropriate authorities and the ultimate outcome of the matter cannot presently be determined. Their cost of acquiring these shares was around Rs 76/- a share.My question to you Prof is that how would you as an investor view this situation? The pioneer of flip flops in India, Relaxo has led the way for footwear in India over the last four decades!
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