Monopoly Stocks in India: If you want to invest in a stock, what qualities you should look into the stock? Well, there are a lot of things including the business model, management, future growth and financials. But there is one crucial factor that you should consider. It is the competitive strength of the company.
A company with strong competitive advantage would enjoy higher margin, higher growth and better profitability. If you are a follower of Mr Warren Buffet, you might have heard about the term Economic Moat or if you are an MBA, you might have heard about the term Competitive Advantage.
Friends, it is one of the most important criteria before shortlisting a stock for investment. So let’s try to understand what is Economic Moat? Decades ago, Kings used to live in a castle with water surrounding the castle. The entire idea was to build a castle. is to protect the castle from outsiders. Now this water area is also known as moat. Naturally, thicker the moat, better would be the protection. Mr Warren Buffet says that just like the moat covers the castle, every company should have a moat around it that nobody can breach.
What does it mean? It means every company should have some quality that competitors can’t replicate. Think this way. Let’s say you start a panipuri stall in your city and you are the only person selling panipuri. Now what will happen? People would rush to your stall and you will earn a lot of money. But within few weeks, you will see 10 panipuri stalls around you. Obviously, you will lose a lot of customers and eventually impact your profitability.
So in this case, you did not have an economic mode or competitive advantage. And hence, people were able to copy your business. As a businessman, you would want to have a business that nobody can copy or it is very difficult to copy. In other words, you want to have a strong competitive advantage. As an investor, you would want to invest in companies that enjoys strong competitive advantage. For example, you could have a strong brand name that people only like to buy your products that creates a strong competitive advantage. It could also be via patents or copyrights where nobody can copy your product or service and many other ways.
Now what is monopoly? So monopoly is a situation where there is a single seller. For example, what if you are the only person allowed to sell panipuri in your city? You will enjoy monopoly. Friends, India is not a monopoly market. It is a competitive market where you have multiple players in each sector. However, sometimes your brand becomes so big that people only want your products and that’s where you enjoy the monopoly or you can say a large market share as compared to competitors.
Please note that with monopoly we mean a very high market share in the sector and it is very important to understand that it is not just the market share that matters. There are two more key points to consider. First is the size of the market. For example, if a company has 100% monopoly in a sector, but the overall sector size is just 100 crore. And company B has 50% market share in the sector, but the overall size of the sector is 1000 crore. Then obviously company B is better than company A.
Second factor is growth of the sector. If company A has 50% market share in the sector, which is growing at let’s say 20% CAGR. vs company B with 75% market share with a CGR growth of 5%. Obviously company A is better than company B. So I have considered multiple factors in curating this list of top 15 monopoly stocks. Market share is just one factor. Then I have also considered the size of the market, overall future growth in the market, management of the company and finally the financials. I like companies with high growth. and high profitability ratio. As always, this content is only for long term investors and not for day traders.
Hindustan Unilever
Established in 1933, HUL is the biggest FMCG company in India. It claims that 9 out of 10 households in India use one or more product of HUL. Some of the top brands of HUL include X, Lakme, Pierce, Fair and Lovely, Closeup, Pepstodent, Clinic Plus, L18, Hamam, Boost, Horlicks, Knorr, Lipton, Brew, Red Label, Taj Mahal, Kisan, Quality Walls, Rin, Surf XL, Wim, Domex, Pure It etc. H12 has more than 40% share in Indian FNCG market within the soap and personal care category.
Friends FMCG is one category that would continue to grow as there would be an increase in consumption of soap, shampoo, face wash etc. More and more people are moving from non-branded to branded products and that would fuel the growth of HUL. Over the past 5 years, HUL profits have grown at a CHR of 13.3% and its average ROC is 108%. Yes 108%. Just unbelievable. HUL is trading at a trailing 12 month PE of 68, which is similar to its 5 year median PE of 65. It means HUL is looking fairly valued at current levels. Hence, investors can definitely consider investing in HUL at current levels. I have already created an in-depth video on HUL.
Asian Paints
Established in 1942, Asian Paint is the biggest paint company in India. Today Asian Paint is a well-known brand and people specially ask for Asian Paint products for painting and coating purpose. It enjoys more than 50% market share in decorative paint category in India. There is a rising demand in the paint category due to rising income level and need for unique and personalized home. and office space. Asian paint is well positioned to cater to this growing demand. It has also forded into other segments including kitchen, bathroom and furniture.
Today, Asian paint is not just a paint company but a complete decor solution provider. Over the past 5 years, Asian paint profits have grown at a CEGR of 14.2% and its average ROCE is 37% which is great. 12 month PE of 84 and its 5 year median PE is 60. So currently Asian paint is looking a bit overvalued. If you have already invested in Asian paint then I would suggest holding it. If you haven’t invested in Asian paints then you should make an entry with small buy and add more on dips or add periodically. I have already created an in-depth video on Asian paints.
Maruti Suzuki
Established in 1982, Maruti Suzuki is a well-known brand in every household in India. Started with Maruti 800, Maruti Suzuki has come a long way with multiple cars catering to mass segment including the most popular Swift, WagonR and Alto. Today, Maruti has a complete series of Nexa branded cars in mid premium segment that not only look stylish, but are also available at low cost. It includes Baleno, Brezza, Sias, S-Cross and many more. Many people prefer Maruti due to its brand name, affordable cost, strong distribution network, high availability of service centers, low cost maintenance and a good resale value.
Today, Maruti has almost 50% share in passenger car market in India. It would be interesting to see how it caters to the electric vehicle market. Over the past 5 years, Maruti profits are negative at CAGR of 0.39% but it was due to poor growth in auto sector. Its average ROC is 18.8%. Maruti Suzuki is currently trading at trailing 12 month PE of 48 and its 5 year median PE is 37. I expect the auto sector to pick up now and perform well for the next 3-5 years. I think Maruti is a great buy at current level.
Eicher Motors Ltd
Established in 1948, Aishah Mota is the parent company of Royal Enfield that has a die-hard fan following. Once on the verge of closure, Royal Enfield is one of the biggest turnaround stories of Indian corporate world and one of the biggest wealth creators for its stakeholder. Today Royal Enfield has many products in the portfolio including Meteor, Interceptor, Continental It enjoys a market share of more than 85% in 250cc bike category. In the future, the biggest trend in the bike segment would be premiumization, where people are willing to pay high prices for premium and differentiated products. Royal Enfield is well positioned to cater to this trend.
Over the past 5 years, Royal Enfield has been a major market share in 250cc bikes. Eicher Motors profits have grown at a CGR of 25.8% and its average ROC is 41.2% which is exceptional. Eicher Motors is currently trading at a trailing 12-month PE of 64 and its 5-year median PE is 40. The higher PE is mainly due to low earnings due to slowdown in auto sales. I think Eicher Motors is a great buy at current levels as there would be high demand in the auto sector.
Pidilite
Established in 1959, Pidilite is the parent company of Fevicol, Fevicwik, Fevistick and Dr. Fixit. Today, when consumers visit the shop, they don’t say that give me an adhesive, they say that give me Fevicol. They don’t say that give me a glue stick, they say that give me Fevicwik or Fevicwik. Just imagine the brand value of Fevicol. Its products are the synonym of entire category.
Pidilite enjoys more than 65% market share in the Indian Addisive category. And I see a strong growth in this sector on account of increase in construction activity where people would need Fevicol for furniture, Dr.Fixit for waterproofing and there is also a high demand from packaging industry from e-commerce companies, which again require addisives. and its average ROC is 37.8% which is again exceptional. PdLite is currently trading at trailing 12 month PE of 87 and its 5 year median PE is 58. At current levels, it is looking slightly overvalued. But again, it is a must have stock in the portfolio and investors can keep buying it periodically for long term wealth creation.
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