Top 15 Monopoly stocks in India
If you want to invest in 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 a strong competitive advantage would enjoy higher margins, higher growth, and better profitability. I have divided this article into 2 parts. This is the 1st part of the article, I will explain 1st explain what is competitive advantage and what is monopoly, and then I will list down the top 5 monopoly stocks. In the 2nd part, I will cover the next 10 monopoly stocks.
Alright, let’s get started.
What is a competitive advantage? If you are a follower of Mr. Warren Buffett, you might have heard about the term “economic moat”. Or if you are an MBA, you might have heard about the term “competitive advantage”.
It is one of the most important criteria before shortlisting a stock for investment. So let’s try to understand what is an economic moat.
Decades ago King use to live in a castle with water surrounding the castle. The entire idea is to protect the castle from outsiders. Now, this water area is also known as a moat. Naturally, the thicker the moat, the better would be the protection. Mr. Warren Buffett says that just like a 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 “Pani-Puri” stall in your city. And you are the only person selling Pani-Puri. Now, what will happen? People would rush to your stall and you will earn a lot of money. But, within a few weeks, you will see 10 Pani-Puri 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 moat 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 enjoy a 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 be via patents or copyrights where nobody can copy your product or service. And many other ways.
Now, what is a monopoly?
So monopoly is a situation where there is a single seller. For example, what if you are the only person allowed to sell Pani-Puri in your city? You will enjoy a monopoly. India is not a monopoly market. India 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 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 2 more key points to consider: 1st is the size of the market. For example, if company A has a 100% monopoly in a sector but the overall size of the sector is just 100 Cr. And company B has a 50% market share in a sector but the overall size of the sector is 1000 Cr. Then company B is better than company A. 2nd factor is the growth of the sector. If company A has a 50% market share in a sector that is growing at let’s say 20% CAGR vs company B with a 75% market share in a sector that is growing at 5%. Obviously, company A is better than B.
So I have considered multiple factors in curating this list of top 15 monopoly stocks. Market share is one factor, then I have 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 article is for long-term investors and not for day traders.
Top 15 companies with strong monopoly
Established in 1933, HUL is the biggest FMCG company in India. It claims that 9 out of 10 households in India use 1 or more products of HUL. Some of the top brands of HUL include Dove, Lifebuoy, Lux, Ponds, Rexona, Sunsilk, Tresemme, Vaseline, Axe, Lakme, Pears, Fair n Lovely, Closeup, Pepsodent, Clinic Plus, Elle 18, Hamam, Boost, Horlicks, Knorr, Lipton, Bru, Red Label, Taj Mahal, Kisan, Kwality walls, Rin surf excel vim, Domex, Pureit, etc. HUL has more than 40% market share in the Indian FMCG market within the soap and personal care category. 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 CAGR of 13.3% of and its average ROCE is 108%. Yes, it's 108%. Just unbelievable.HUL is trading at a TTM 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.
14. Asian Paints
Established in 1942, Asian Paints is the biggest paint company in India. Today, Asian Paint is a well-known brand and people especially ask for Asian Paints products for painting and coating purposes. It enjoys more than 50% market share in the decorative paint category in India. There is a rising demand in the paint category due to rising income levels and the need for unique and personalized home and office space. Asian paint is well-positioned to cater to this growing demand. It has also forayed into other segments including kitchen, bathroom, and furniture. Today Asian paints are not just a paint company but a complete decor solution provider.
Over the past 5 years, Asian paint profits have grown at a CAGR of 14.2% of and its average ROCE is 37% which is great! Asian Paints is trading at a TTM PE of 84 and its 5-year median PE is 60. So at the current level, Asian Paints is looking a bit overvalued. If you have already invested in Asian Paints then I would suggest holding it. If you haven’t instead in Asian Paints then you should make an entry with a small buy and add more on dips or add periodically.
13. 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 the mass segments including the most popular Swift, WagonR, and Alto. Today Maruti has a complete series of Nexa branded cars in the mid-premium segment that not only look stylish but are also available at low cost. It includes Baleno, Brezza, Ciaz, 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 good resell value.
Today, Maruti has almost 50% market share in the passenger car market in India. Although it would be interesting to see how to caters to the electric vehicle market. Over the past 5 years, Maruti profits are negative at a CAGR of -0.39% but it was due to poor growth in the Auto sector. Its average ROCE is 18.8%.
Maruti Suzuki is currently trading at a TTM 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. Hence, I think Maruti is a great buy at current levels.
12. Eicher Motor
Established in 1948, Eicher motor 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 the Indian corporate world and one of the biggest wealth creators for its shareholders. Today Royal Enfield has many products in the portfolio including Meteor, Interceptor, Continental GT, Himalayan, Classic, and Bullet. It enjoys a market share of more than 85% in the 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 a premium and differentiated product. Royal Enfield is well-positioned to cater to this trend.
Over the past 5 years, Eicher Motor's profits have grown at a CAGR of 25.8% and its average ROCE is 41.2% which is exceptional.
Eicher motor is currently trading at a TTM PE of 64 and its 5-year median PE is 40. This higher PE is mainly due to lower earnings due to a slowdown in auto sales. I think Eicher Motor is a great buy at current levels as there would be high demand in the auto sector.
Over the past 5 years, Pidilite profits have grown at a CAGR of 18% and its average ROCE is 37.8% which is again exceptional. Pidilite is currently trading at a TTM 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.
So in this article, we discussed what is a competitive advantage and what is a monopoly. We also discussed the top 5 monopoly stocks which include HUL, Asian Paints, Maruti Suzuki, Eicher Motor, and Pidilite. In the 2nd part, I will discuss the next 10 monopoly stocks. So stay tuned!