Invest in the best: monopoly stocks of India
Learn about monopoly companies of various sectors and how to identify them
You must have played the Monopoly game when you were young, remember?
The goal was to own as many properties as possible and take such decisions to ensure that you stay rich and other players get eliminated. Well, monopoly companies do exactly that, in their respective industries.
Monopoly stocks are those types of companies that maintain the largest market share in their industry due to a major competitive advantage.
They are also known as ‘MOAT’ stocks. A ‘moat’ was a hole that surrounded medieval castles. It was used as a defense mechanism to stay protected from enemies and invaders. Companies having moat hold certain advantages that make it difficult for others to compete with them. Moats can be high barriers to entry, government restrictions, production advantage, etc.
This advantage usually gives them pricing power, i.e. ability to offer a product at a price that helps them achieve superior profits as well as maintain market share.
Some of the Indian monopoly stocks
IRCTC: The Indian Railway Catering and Tourism Corporation Ltd. is the only company allowed to sell railway tickets, and water bottles and provide food services on the railway premises. It is the only company in this segment and the majority of its revenue comes from the internet ticketing segment.
Hindustan Aeronautics Ltd.: It is the only company that designs and manufactures fighter jets, helicopters, jet engines, marine gas turbine engines, and a lot more defense machines for the Indian military.
MCX: Multi Commodity Exchange is India’s first commodity derivatives exchange. With a market share of 92% in India’s commodity exchange sector, it has a 100% monopoly in the trading of precious metals, energy & base metals.
Marico:- One of the old FMCG companies of India, Marico commands a 73% market share in the premium refined edible oil segment. This along with other oil products forms 90% of their revenue.
Pidilite: It is the leader in the adhesive and industrial chemical market with a 70% market share. It also sells adhesives and sealants, construction and paint chemicals, automotive chemicals, industrial adhesives, and textile resins.
How to identify & analyze monopoly stocks?
Every industry is different, but monopoly stocks of all kinds have a few common characteristics:
A monopoly stock commands the highest market share in the industry. It is known as the leader since most buyers prefer goods/services of theirs. This occurs mostly because their goods are of the best quality available and at reasonable prices.
Being the market leader means that they produce the most goods / serve the most clients relative to other competitors. Such companies take advantage of mass production to lower their total costs, hence being able to offer their products at low prices. The price factor is seen as a driver to solidify their market share.
Monopoly stocks are proven to have some strategic advantage, due to which they can command such market share. Identifying what that factor is and where it comes from is key to understanding their competitive advantage. It can be government control, huge availability of working capital, access to product-specific resources or something else. The company needs to maintain that advantage in order to exercise market power.
Finally, a company may be a monopoly, but not investable. Some companies, usually government-owned, are such that even after having a good market share are not profitable. The reason for this is that their goal is service to the nation and not profitability. Monopolies can also be a bad investment if new businesses are entering the market with innovations that offer more value to customers than the monopolist’s products.
Monopolies are such businesses that command huge market share due to some superior advantage. As long as the competitive advantage remains, they are likely to generate the most revenues and profits in the industry.