What approach do you follow while investing in equities?
Are you among those who invest in stocks which grow sales and profits at a fast rate, i.e. growth stocks?
Or do you follow the rules of value investing and wait for the right time to invest in value stocks?
There have been several debates around growth stocks vs value stocks. We think this has distracted investors from identifying the right companies.
This is where monopoly stocks come in. Investing in monopoly or near-monopoly companies is considered safe.
It’s why investing legends like Warren Buffett are attracted to monopoly businesses. With the absence of intense competition, a company is poised to do well and generate profits with strong cash flows.
In July this year, we wrote to you about the top 4 companies that are strong monopolies. The article pointed out IRCTC, IEX, CAMS, and CDSL.
We went a step ahead in November and wrote about India’s top monopoly stocks to watch out for.
In continuation to this, we’re back with 6 more companies that are near monopolies. Although these companies don’t have 100% market share in their segments, they command a dominant position.
These companies should be on your watchlist for 2022.
#1 Wabco India
Wabco India is a subsidiary of Wabco Holding Inc, USA, and is engaged in the business of manufacturing and marketing conventional braking products, advanced braking systems, and other related air-assisted products and systems.
It also provides software development and other services.
The company holds around 80% market share in medium and heavy vehicles braking system.
Being a market leader, the company boasts of strong customer base, including Tata, Ashok Leyland, Audi, and many more.
It has 5 manufacturing facilities, 2 in Chennai, 2 in Jamshedpur, and one in Pantnagar. It also has a technology center and a vehicle testing facility.
The company’s stock holds the status of one of the most highly priced stocks in India. Currently, Wabco India shares trade at Rs 8,500 levels, just 2% away from its 52-week high.
Over the year gone by, Wabco shares are up around 53%.
The company has a lot to show in terms of financials. It has reported steady revenues and profits over the years. It has zero debt on its balance sheet.
Given its monopoly status and good financials, mutual funds seem to be bullish on the stock. They have increased their stake in the company over the past four quarters.
#2 Coal India
With around 80% market share in coal production in India, Coal India is one such public sector undertaking (PSU) which makes this list.
Coal India possesses 48% of its reserves and accounted for around 83% of India’s total coal production for fiscal 2021. In India, 57% of the primary commercial energy is coal-dependent and Coal India alone meets to the tune of 40% of primary commercial energy requirements.
While the government ended the monopoly status of Coal India in Budget 2020, the company still holds a dominant position in market.
In last year’s budget, Finance Minister Nirmala Sitharaman announced commercial mining of coal by the private sector which ended Coal India’s monopoly.
The above move did not hurt Coal India as it was falling short of targets. The nation imports coal to meet the shortfall even as demand is expected to grow at 5%.
With the world’s largest coal reserves, Coal India has abundant resources. Yet, the company consistently fails to meet the demand and overall expectations.
What more, it has not been able to meet its revised targets either.
As Coal India’s monopoly ended, it boosted its output. The company appointed contractors for 15 new mines to meet its targets.
In the past year, shares of the company have underperformed benchmark indices and gained just 8%.
Even with good financials and a track record of strong dividend yields, the company has the reputation of underperformance (like ITC).
In the last ten years, Coal India has paid 18 dividends. Its dividend yield stands at over 10%.
#3 Asahi India Glass
Third on the list we have Asahi India Glass – India’s leading value-added and integrated glass solutions company. It’s a dominant player, both in the automotive and architectural glass.
Asahi India provides end to end solutions in the entire glass value chain – from the manufacturing of float glass, processing, fabrication, and installation.
It has around 70% market share in automotive glass segment. Nearly three out of every four cars, SUVs, and MUVs manufactured in India has the company’s glass.
With this dominant position in the Indian auto glass market, the company is recognised as a go to supplier. Its customers include Maruti Suzuki who is also its promoter, Hyundai Motors, Tata Motors, Mahindra, Toyota, MG, Renault, and many more.
While the company has good track record on the financials front, debt is the only worry. Over the years, Asahi India Glass has taken more debt on its books than equity.
Its debt to equity ratio has stayed above 1 for the past 16 years. At one point in 2013, the debt to equity ratio even ballooned to 38.6! That’s massive.
An important point to note here is that the company is consistently reducing debt.
Over the past one year, shares of the company have gained 75%.
The stock could rally some more as demand outlook for the architectural glass has improved with the revival in residential real-estate demand.
#4 IndiaMART InterMESH
Established in 1999, IndiaMART InterMESH is the largest B2B online market space connecting buyers with sellers. It enjoys more than 55% market share in India’s online B2B classified space.
The company provides a platform for small and medium enterprises as well as individuals to showcase their products and services on digital platforms. Today, the company boasts of a portfolio of 120 m plus buyers, 6.4 m suppliers, and 71 m listed products and services.
Since its listing on the bourses, the stock of IndiaMART InterMESH has had a great run. In February this year, shares of the company soared to Rs 9,950 from the issue price of Rs 973.
That’s almost 10x gains. But the stock has come under pressure of late.
India’s only listed B2B marketplace is facing near-term challenges with medium and small enterprises, which form the bulk of its client base.
The company’s client additions have gone down due to lockdowns, which are taking a toll on the stock.
Still, IndiaMART’s near-monopolistic nature and its unique business has won the favor of investors. The company is cash positive and carries no debt. Its sales and profits have grown consistently for the past five years, with one exceptional year.
#5 Delta Corp
Delta Corp is the largest gaming company in India. It’s also the only listed Indian gaming company.
The company has a dominant presence in Goa’s offshore casino market. It has around 55% market share in the organised casino market in India with three major areas of business.
Apart from this, the company has also forayed into online gaming, with the acquisition of Adda52.com.
As the company has a first mover advantage, it enjoys synergies of opening up new casinos at locations. Getting the necessary approvals in its business is very tough and this is great for the company as there’s almost no competition.
The centre is unlikely to issue new licenses to new players. Also, land-based casinos are allowed only in five-star hotels. So Delta holds a competitive advantage here.
The company has not yet received permission for its casino in Daman. If it gets approval, its revenues will go up.
India has allowed entry for vaccinated tourists from 99 countries and opened borders after nearly two years. This is beneficial for the beleaguered hospitality sector and for a stock like Delta Corp.
The company has massive operations in Goa, a state that’s a favorite with foreign tourists. As more tourists pour into Goa, the higher are likely to be the footfalls for Delta Corp.
Ace investor Rakesh Jhunjhunwala has been holding on to this stock in his portfolio for several years now. He acquired 12.5 lakh shares in the company through a bulk deal back in 2016 at an average price of Rs 106.54.
#6 Bajaj Consumer Care
Bajaj Consumer Care is a dominant player in India’s hair oil industry, with a pan-India presence, well-diversified product basket and multiple brands.
Its flagship brand – Bajaj Almond Drops Hair Oil is a leading name in the Hair Oil market.
In the light hair oil (LHO) category, Bajaj Consumer has maintained its dominance over the years. As per its annual report, the company’s market share in this category has increased by 1.9% to 62.5% in fiscal 2021. This give it a monopolistic status in the LHO category.
However, it’s not just a LHO player anymore and has expanded reach by foraying into coconut and amla hair oil categories with Bajaj Amla Aloe Vera Hair Oil and Bajaj Pure Coconut Hair Oil.
The hair oil (coconut and non-coconut) industry in India is the second largest personal care category, valued at nearly Rs 12,800 crore. Marico, Bajaj Consumer Care, and Dabur command around 62%-63% of the market share.
This year, Bajaj Consumer achieved the highest-ever value market share of 11.1% in the total hair oil market. The company is among the top dividend paying companies having paid Rs 8-9 per share average dividend in the last 10 years. For fiscal 2021, two thirds of profit were paid out as dividend.
Despite the monopolistic status, shares of Bajaj Consumer have underperformed. Have a look at the company’s performance over the past five years.
While the industry itself is not a fast growing one and is at one of its lowest points in terms of growth at present, there is a substantial scope for the top players with deep pockets to increase market share at the cost of other local brands, and outgrow the industry.
Are all monopolies risk free?
A simple answer to this question would be a firm No.
There have been cases in the past where companies enjoying monopoly went bust when there was a stiff competition.
As Tanushree Banerjee, co-head of Research at Equitymaster, rightly pointed out in one of her editorials, to think that all monopolies are risk free is a huge mistake.
Here’s an excerpt of what she wrote,
If you are wondering whether monopolies in India have destroyed wealth, look no further than the public sector units…
VSNL (bought over by Tata Communications)
And of course, there are the unlisted ones like Air India which accumulated billions in losses over decades.
It’s not that the private sector monopolies stay untainted. Bharti Airtel lost its wealth creating potential as soon as India’s telecom sector saw stiff competition.
Maruti Suzuki and L&T have struggled to retain their market share over past decade.
So, it’s not the absence of competition or the market share that determines true wealth creating potential of monopolies.
While investing in monopoly businesses, look out for companies with strong moats.
Do take into consideration the company’s business’s ability to maintain its competitive advantage over its peers.
Overall, evaluate your favourite monopoly stock like any other business, which has chances to fail.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
(This article is syndicated from Equitymaster.com)
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)