»5 Minute Wrap Up by Equitymaster

On This Day - 7 JANUARY 2019
Our Infinite Return Business is a Good Pick Now

Editor's note: Dear reader, a few weeks ago, the Smart Money Secrets team recommended what they call an Infinite Return Business. This is a high-quality stock with excellent profit potential and should be considered before it runs up from current levels. I recommend reading what Sarvajeet Bodas, co-editor of Smart Money Secrets, has to say about it.

Sarvajeet Bodas, Research analyst, The 5 Minute Wrapup

I wrote you a few weeks ago about my latest recommendation: An Infinite Return Business. If you missed it, you can read it here.

I wrote about the duopoly nature of its industry and how it is protected by regulatory policies.

Basically, the regulations are so stringent that it's almost impossible for a new player to enter. In fact, even the pricing is decided by the regulator.

Interestingly the company we've recommended is gaining market share within the duopoly, i.e. from the other player.

Yes, despite the duopoly and the tight control over pricing - it's gaining market share.

At Smart Money Secrets, we try to find companies that are gaining market share in their industries.

We believe, the first important sign of an excellent company is that it constantly proves its ability to improve market share.

In other words, it has something going for it that pulls in customers and grows faster than the industry.

But it's not so simple. Gaining market share can good or bad.

Bad Market Share Gain - This happens when one company under-prices the other and takes the profitability of the whole sector down. We call it a pricing war. This is what we saw in Telecom over last decade and specially after the emergence of Reliance Jio.

This kind of market share gain may not be sustainable because the only point of difference in the mind of the customer is the price...and that is not a good point of differentiation in my view. A company should raise its prices with inflation and not reduce them.

Market Share Gain + Price War = Bad for the Company

Good Market Share Gain - This is the category we want our companies to be in. This happens when a company gains market share by providing customers differentiation in terms of service or product.

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It has a grand total of ONE company as competition – and tough industry regulations make it near impossible for a new player to get in.

And even within this duopoly, this company is steadily gaining market share by targeting a segment the other company is staying away from…

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Generally, this differentiation is difficult for competitors to imitate.

And because of this, the company can keep on gaining market share year after year.

This is generally a Win-Win Solution for both the customer and the company.

Market Share Gain + Differentiated Offering = Good for the company.

Sustainable Market Share Gain = Differentiation in Offering

Food for thought - If a company is the lowest cost producer and still provides differentiated services/products at most competitive prices, it is very good for the company.

So, when you see a company gaining market share, don't jump in thinking it is a strong player.

Rather, activate the Sherlock Holmes in you and identify the source of the market share gain. More on this in today's Chart of the Day.

Coming back to our recommendation. I was surprised to see this company gaining market share in a duopoly with pricing control.

In fact, if we look at the core services, this company has nothing different to offer.

Then how it is gaining market share?

Well after some brainstorming, reading a lot about the company, meeting the management, and finally few of its customers, we found the answer.

This company has devised a great offer that takes away the pain of its customers.

It studied the problems they have while conducting their business and devised an offer that solved it. It's business then took off.

It made the offer in such a way that it was a Win-Win solution for both, the customer and the company itself.

What a sound strategy.

A little tweak in the offer and a little tweak in the payment terms resulted in sizeable profits.

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And that is the reason we believe our recommendation will do well. We believe, the market-share that it is gaining is sticky and here to stay. The profits will keep growing.

We have published the detailed recommendation report on this stock.

If you would like to sign up for Smart Money Secrets, you can do so here.

Chart of the Day

Talking about market share gains, it is very interesting to see a company gaining market share on the back of product/service differentiation.

However, many a times, investors and analysts get excited by looking at market share gains even if they are at the expense of profitability.

Thus, whenever we see a company gaining market share, we should be sceptical and try to investigate the reason for the same.

This is exactly what we did.

When we saw the market share gains of this company, we were stunned.

If You See This Kind of Market Share Gains, Don't Get Excited but Investigate

I activated the Sherlock Holmes in me.

The first thing I did was find out what this company is doing different from the other player and what are the dynamics of the industry.

What we found was interesting. This company does two things differently.

First, it chose a different market and second, it tried to understand the problems or the pain points of its customers...and provided solutions to them.

It offered them a Win-Win solution.

Happy Customer + Happy Company = A Win-Win Solution

And if history is to be believed, win-win solutions have durability and longevity against a win-lose or loose-loose solutions.

At Smart Money Secrets, we are always try to find obvious answers, which off course don't look obvious until we find them.

Sarvajeet Bodas
Sarvajeet Bodas (Research Analyst)
Co-editor, Smart Money Secrets

PS: Sarvajeet Bodas and Radhika Pandit , co-editors of Smart Money Secrets, are finalising this month's stock recommendation. They will publish the full recommendation report later this month. If you haven't subscribed to Smart Money Secrets yet... do so here.

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