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First Come, First Earned

Aseem Dhru, MD & CEO, HDFC Securities, says that the first-mover advantage is often the key to a company’s moat

On moats in the modern era
Andy Grove of Intel once famously said that only the paranoid survive. Companies that continuously build newer economic moats survive in today’s fast-changing era of globalisation. The law of economics says that given time everything erodes, including moats. Nothing is permanent. But from time to time businesses create strong fortified walls around them which protect them from competition for decades.

On moats arising out of first-mover advantage In India a lot of moats get established due to first-mover advantage. Sometimes new opportunities arise with the opening up of a sector. If the first mover gets its business model right and takes a firm grip of the market, later entrants find it difficult to establish a foothold.
The power sector opened up to private players only five-seven years ago. Players like Lanco, GMR, Adani, Torrent and Indiabulls have come in. Once a player has set up a power plant, it will effectively lock out other players. To set up a power plant requires a number of government clearances. You need to establish raw material linkages for coal or gas. The power plant ties up with the local state electricity board for supplying power. Thus, once a player has set itself up, it will be difficult for a new company to come in and set up a rival power plant.
Adani is on its way to becoming one of India’s largest private power producers. Its other business, that of setting up ports, is also one that rivals cannot replicate easily. Once a Mundra kind of a port is set up, it creates long-term economic advantages. The competition can’t come in and set up a rival port nearby because the sheer scale of setting up a port is high and the latter will not be viable.

On valuation
It is not necessary that a company that has a strong competitive advantage will also deliver superior stock market returns. Besides searching for an economic moat, you also need to pay attention to valuation.