There are certain sectors that are high growth sectors and there are other sectors that are low growth sectors. For example, auto has typically been a high growth sector in India while IT and pharma used to be consistently high growth sectors for a long time. But utilities have been low growth sectors; especially power and telecom. Similarly, metals have been high growth sectors in the commodity up-cycle but have been low growth sectors in the commodity down-cycle.
What are of interest are not sectoral trends as they are here to stay. What we are looking at is why some companies manage to grow in an industry which is struggling to grow. Take a few examples. Why is Motherson Sumi able to grow consistently, while the likes of Amtek Auto have struggled to grow? How is Reliance Jio able to grow consistently while others like Idea are really in a bad shape? Why are private banks like HDFC Bank and IndusInd able to show consistent growth while the PSU banks find themselves under a mountain of NPAs? What are the characteristics of high growth companies? Are there any secrets of high growth companies that others can emulate? In terms of DNA, Vision and Philosophy; what are high growth companies actually composed of?
1. They have a great value proposition
You cannot grow consistently unless you have that USP in your basic business model. While the entire telecom industry was focusing on voice, Reliance Jio changed the rules of the game to focus on data and it actually commoditized voice. Motherson Sumi handled a combination of managed growth through a global footprint. Hero Moto disrupted the two-wheeler industry in the 1980s and 1990s by redefining style and cost efficiency. It all begins with a unique value proposition that can be sustained without compromising on financials.
2. They have obsessed customers and loyal employees
Most high growth companies tend to have a mix of really obsessed customers and employees who are committed. Infosys experienced that (in fact most of IT and pharma) for over 25 years. Even in the banking system there are banks like Kotak Bank and HDFC Bank that have really built a good combination of these two. This removes two of the biggest frictions that companies normally experience in their growth.
3. Focus more on customer monetization and retention
Customers have a choice to focus on customer acquisition, customer monetization or on customer retention. While nobody disputes the importance of customer acquisition, just adding customers does not add value beyond a point. It is very expensive to create a customer but it costs less to retain them. In fact, the real benefit comes if you can monetize your customers in multiple ways and substantially increase the ROI per customer. This is an important feature that sets the high growth companies apart from the rest.
4. They focus extensively on execution and process
In their landmark book, “Execution – The art of getting things done”, Larry Bossidy and Ram Charan focused extensively on why it is important for the top management to focus on fine tuning and execution. That is where most companies lose focus and companies are unlikely to grow rapidly unless the top management is fully and intimately involved in the entire execution process. In fact, the top management of these high growth companies spend an inordinate amount of time trying to fine tune their processes and they understand the importance of actually getting things done at the grass-root level.
5. They take big calculated risks in bad times
Consistent growth companies are the ones who took big calculated risks at their tipping point. Reliance Industries took a calculated bet on petrochemicals, oil and much later in telecom. Similarly, Kotak Bank took a bet on a banking license and transformed into a high growth company. Eicher is a classic example of a company that took a big risk in terms of high-end motorcycles and that has paid off immensely for them. You have to take those big risks in bad times, but such risks also need to be calibrated and well managed.
6. They are focused on margins and efficiency
If you look at consistent growth company; you will find an obsession with their profitability and the efficiency of utilization of assets. Take the case of HDFC Bank. They have literally been obsessed with their Net Interest Margins and their profitability per employee. That has helped them to maintain high growth. Managing margins focuses on handling operations at high levels of efficiency and also the post EBIT allocations to interest and tax. Since these are high margin and high efficiency businesses, such high growth companies tend to be low dividend payout businesses as it makes more sense to invest and plough back into their own high margin business.
7. These companies are very economical in the use of capital
You will rarely find high growth companies that have been too liberal with their capital issuances. Be it equity or long term debt, these high growth companies are based on the belief that capital needs to be serviced and hence you need to be economical in their use. In the last 10 years, the companies that failed to grow and destroyed shareholder wealth were the companies that either took on too much of debt or diluted their equity beyond a point.
If you look at the above 7 points, most are quantitative but some of them are qualitative. But if you juxtapose these factors with high growth companies then you find that most of these high growth companies are following most or all of these rules. Therein lays the secret of high growth companies!