This tool of warfare may have died a slow death. But think of economics and the relevance of economic moat springs back to life, in its full glory. In a competitive world, where a slight slip may prove a costly lapse over the long term, a company is judged by the shield of armour it keeps. Crystal Barretto and Kiran Kabtta Somvanshi of ET Intelligence Group analyse companies with strong and sustainable moats
IN DAYS of yore, castles and towns were protected from invaders by moats ? a deep, broad ditch surrounding the fortified place, either dry or filled with water, providing a preliminary line of defence. The wider the moat, the more easily the castle could be defended while a narrow moat did not provide strong enough protection against the enemy.
While medieval moats are no longer a tool of warfare, in economics a moat is considered to serve as a defence against competition and investors may look into the width of the moat around a company's business to adopt their investment strategy.
The term ?economic moat? was coined by billionaire investor Warren Buffett. ?In business, I look for economic castles protected by unbreachable moats,? Buffett has said. To him, the castle is the business, and the unbreachable moat is the competitive advantage one company has over others in the same sector, which makes it impossible for other firms to touch its market share. The wider the moat, the larger and more sustainable is the competitive edge.
An economic moat can be a business model that is hard to replicate, a strong brand value that is tough to match, pricing power that can undercut rivals on low costs, high switching costs that involve a one-time expense which a buyer incurs to change from one product to another, or intellectual property such as product patents. A company having a wide moat can prevent others in the same business from eating into its market share.
The moat principle suggests that investors should choose companies that have leading market shares, have sustained these over a period and are more likely to stand the test of time. The absence of other listed peers within the same sector is not a strong enough moat for a company as it is not sustainable, unless the industry is fragmented and unorganised where there is little scope for the market leader to lose its position.
Using the economic moat theory as a qualitative tool, ET Intelligence Group gives you eight well-moated companies from different sectors of Indian Inc. The companies have also been evaluated using quantitative parameters like net profit and sales growth, return-on-capital, return-on-equity and dividend payouts. The data have been analysed over five years, except for OnMobile which was listed three years ago, but has been included in the list as it belongs to an industry that is relatively young and shows great promise.
Reliance Industries
Moat 
India's largest private sector enterprise with businesses in energy and materials value chain.
Effect
It is India's largest refiner with the world's biggest refinery complex at Jamnagar in Gujarat. Its two refineries in the western state are capable of processing heavier grades of crude. The company has a processing capacity of 1.24 million barrels a day and account for about 1.6% of global refining capacity.
It is the largest polyester yarn and fibre producer in the world.
It is among the top 5-10 producers in the world in petrochemical products All these large-scale projects have enabled the company to benefit from integration and safeguard margins even in times of turmoil
Mcleod Russel
Moat 
The world's largest tea producer.
Effect
Mcleod Russel enjoys a clear leadership in tea production and margins in India, the largest producer and consumer of tea in the world
Its annual production capacity of 100 million kg is much higher than the second player in India, Jayshree Tea, which has an installed capacity of 30 million kg per annum
It earns the highest operating margins in the domestic tea industry, with most of its tea estates situated in the highyielding areas of Assam
In last five years, the company grew its plantations through a series of acquisitions in India and countries like Vietnam and Uganda
It is now looking at regions in Africa to further expand capacity
Colgate Palmolive (India)
Moat 
Well-known brand name in oral care category
Effect
The company enjoys market leadership of over 50% in toothpaste business
Oral care category constitutes over 90% of the company's total revenue
Strong brand equity and a wide distribution network have helped the company maintain its leadership despite the presence of brands like Closeup and Pepsodent of HUL and herbal toothpastes like Meswak and Babool
The company uses aggressive advertising to fight competition
OnMobile Global
Moat 
Business strategy - expansion in overseas markets to gain better synergies and implement customer-oriented applications.
Effect
The company has emerged as a value-added services provider of choice for domestic and global mobile telecom operators. This has helped diversify the risk associated with falling profitability of Indian telecom companies
Using acquisitions as a strategy to increase its deliverables, it now has access to 21 global markets and solutions based on the third generation or 3G platform With nearly half of its revenue expected from the overseas markets, margins should improve by 150-200 basis points from the current level of 12-13%
Nestle India
Moat 
Strong brands like Maggi (noodles and ketchup), Cerelac (baby foods), and Nescafe (retail coffee).
Effect
The foods company commands leadership in all the above product categories that together contribute around half of its total sales
Sustained double-digit sales growth across all product categories
Enjoys over 70% market share in the instant noodles segment through its Maggi brand
Despite entry of big players like HUL, GSK Consumer Healthcare and ITC in the instant noodles space, Nestle has a competitive edge over its peers due to its long association with consumers
The company has been consistently investing in innovative product campaign to reinforce market standing
Sun TV Network
Moat 
Unique business model - ability to command pricing power Monopoly in cable TV business in south India
Effect
Sun TV Network is an undisputed leader in South Indian media industry
It is the only Indian media company to clock an operating profit margin of over 70% consistently over the last five years
The company draws heavily from its political alliance with the ruling DMK party in Tamil Nadu. In case of a change in the power dynamics in the state after the recent Assembly elections, the company's moat may not be sustainable
Shriram Transport Finance
Moat 
India's largest player in commercial vehicle finance
Effect
It is one of the largest non-banking finance companies in India with presence in niche segment of second-hand truck loans, a category with high credit risk and swarmed with unorganised players like money lenders
Its wide low-cost distribution network in rural India and unique organisational model to cater to the segment has enabled it to find success in a segment that was not considered important by most financing companies until recently
The company earns 75-80% of its revenue from the pre-owned truck segment. It has strong pricing power and earns attractive yields relative to its credit costs
It has consistently delivered high growth. Its loan book has grown at a compounded annual growth rate of around 30% between FY07 and FY11
Pidilite Industries
Moat 
Strong brands like Fevicol and MSeal in adhesives and sealants respectively
Effect
The company has market leadership in niche categories like adhesives and sealants It earns over half of its revenues from these categories The company has the credit of creating strong brands even in low-involvement product category like adhesives that has many unorganised players Strong and innovative branding enables it to command a pricing power, thereby protecting its margins
Note: Growth in sales, net profit, EPS and dividend are based on the five-year CAGR ended FY10. P/E and Market Cap are averages for March 2011
(Inputs from Rajesh Naidu, Ramkrishna Kashelkar, Ranjit Shinde, Skandita Agrawal)