Does Investing in Monopoly Stocks Result in a Guaranteed Win?

Kotak Insights | Date 06/07/2024

The most decisive factor when assessing a business's robustness is its pricing power.

This is what Warren Buffett used to say.

When he was still at the helm of Berkshire Hathaway, he highlighted the idea of investing in companies that could raise prices without losing customers to competitors.

He suggested that such companies are so well-positioned that even less competent management could sustain them.

Simply put, the world’s greatest investor had a soft spot for businesses that operate close to monopolistic conditions.

Monopoly and Monopolistic Stocks in India

In the Indian context, several companies exemplify this monopolistic strategy through their market dominance.

• Reliance Industries - Controls a significant share of India's telecommunications market through Jio and has a robust retail presence with Reliance Retail. The key business is oil & gas.

• Tata Consultancy Services (TCS) - Dominates the IT services sector, showcasing significant barriers to entry for competitors.

• Asian Paints —This company is commanding in the paint industry, benefiting from brand loyalty and widespread distribution networks.

There are many more where this came from…

Whereas, if we consider the monopoly stocks –

Mazagon Dock - The company has a monopoly in building and repairing submarines and destroyers.

C.E. Info Systems – Leader in digital mapping space

Indian Energy Exchange (IEX) – Virtual monopoly in the power exchange sector.

Zydus - Zydus Wellness has over 90% market share in sugar-free products. Its product 'Sugar-Free' has a strong presence in India, with a 94% market share in the sugar substitute category.

Container Corporation - Handles nearly 75% of the containers transported via railways.

Hindustan Zinc – It’s the world's second-largest zinc-lead miner and holds a 78% market share in India's primary zinc industry.

CDSL – The only listed depository in India and a key beneficiary of structural growth in capital markets.

CAMS - India's largest registrar and transfer agent of mutual funds with approximately 70% market share.

Hindustan Aeronautics – A major supplier of aircraft, helicopters, engines, etc.

IRCTC – The only authorised entity by the Indian Railways to offer online railway tickets.

How to Invest in Monopoly Stocks?

The companies that are monopolies today were not monopolies a decade back.

For example, no one, including their uncle, predicted that Google and Apple would dominate the in-app ecosystem in phones… or that the retail king Amazon would be the king of cloud services.

Finding such companies with all the monopoly characteristics is difficult because high profitability always attracts new players.

While much has been said about investing in monopoly stocks, you must investigate whether the company will remain profitable in the future.

While a monopoly represents extreme market control, an economic moat showcases the company's relative advantages within a competitive environment. A strong economic moat is always the precursor to becoming a monopoly and enjoying market-beating returns.

Here are some other things you need to keep in mind while investing in monopoly stocks –

• Highlight Unique Market Position
• Focus on the Exclusivity
• Check for recent industry trends

Challenges and Considerations

While monopolies offer lucrative investment opportunities, they pose challenges, such as stifling competition and potentially raising consumer prices.

For instance, the dominance of a few companies in critical sectors like pharma and telecom could raise concerns about consumer choice and pricing fairness.

Also, it doesn’t mean monopoly stocks can’t lose their ‘monopoly’ tag…. A case in point is Maruti Suzuki, the country's largest passenger car manufacturer. After remaining a near monopoly until 1992, the entry of other multinationals resulted in Maruti Suzuki losing market share.

Despite not being a monopoly, Maruti benefits greatly from the Indian auto growth story, its extensive distribution network, and a strong focus on quality and customer satisfaction.

Balancing Investments and Market Health

Investing in companies with strong economic moats can be rewarding.

However, investors need to consider the broader economic implications of such investments.

Balancing these choices with the need for a healthy, competitive market is crucial for long-term sustainability.

In Conclusion

Historically, monopoly companies with large economic moats have provided excellent returns.

For example, Marico, which dominates the hair and edible markets, has consistently outperformed its competitors and offers attractive investment returns.

For investors looking to capitalise on monopoly companies, it is essential to recognise both the potential gains and the broader market implications.

That’s it for today. Happy Investing!

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Disclaimer:

This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.

Investments in securities market are subject to market risks, read all the related documents carefully before investing. Brokerage will not exceed SEBI prescribed limit. The securities are quoted as an example and not as a recommendation. SEBI Registration No-INZ000200137 Member Id NSE-08081; BSE-673; MSE-1024, MCX-56285, NCDEX-1262.