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6 Near-Monopoly Stocks to Add to Your Watchlist

Aug 12, 2022

6 Near-Monopoly Stocks to Add to Your Watchlist

Editor's note: Investing in monopoly stocks is a good idea. These are profitable companies, and they usually have a high return on capital.

Every investor should have a watchlist of monopoly stocks that they are interested in to keep an eye on their performance.

Many investors consider monopoly stocks as the best stocks to invest in because they are less volatile and have a low risk of bankruptcy.

If you want to invest in monopoly stocks, it's important to know what to look for. You need to make sure that the company is profitable and has a sustainable business model. That's what separates a good monopoly stock from a bad one.

You should also check if the company has any pending lawsuits, as well as their debt load and cash flow.

In addition to general criteria like industry analysis, business scope, financial stability, and profit margins, focus on moats while evaluating monopolies.

In January this year, we wrote to you about six stocks which have a near-monopoly in their industry.

The list of stocks is extremely relevant today as some of these companies are available at a discount.

Continue reading to know more...

6 Near-Monopoly Stocks to Keep an Eye on...

What approach do you follow while investing in equities?

Are you among those who invest in stocks which grow sales and profits at a fast rate, i.e. growth stocks?

Or do you follow the rules of value investing and wait for the right time to invest in value stocks?

There have been several debates around growth stocks vs value stocks. We think this has distracted investors from identifying the right companies.

This is where monopoly stocks come in. Investing in monopoly or near-monopoly companies is considered safe.

It's why investing legends like Warren Buffett are attracted to monopoly businesses. With the absence of intense competition, a company is poised to do well and generate profits with strong cash flows.

In July this year, we wrote to you about the top 4 companies that are strong monopolies. The article pointed out IRCTC, IEX, CAMS, and CDSL.

We went a step ahead in November and wrote about India's top monopoly stocks to watch out for.

In continuation to this, we're back with 6 more companies that are near monopolies. Although these companies don't have 100% market share in their segments, they command a dominant position.

These companies should be on your watchlist for 2022.

#1 Wabco India

Wabco India is a subsidiary of Wabco Holding Inc, USA, and is engaged in the business of manufacturing and marketing conventional braking products, advanced braking systems, and other related air-assisted products and systems.

It also provides software development and other services.

The company holds around 80% market share in medium and heavy vehicles braking system.

Being a market leader, the company boasts of strong customer base, including Tata, Ashok Leyland, Audi, and many more.

It has 5 manufacturing facilities, 2 in Chennai, 2 in Jamshedpur, and one in Pantnagar. It also has a technology center and a vehicle testing facility.

The company's stock holds the status of one of the most highly priced stocks in India. Currently, Wabco India shares trade at Rs 8,500 levels, just 2% away from its 52-week high.

Over the year gone by, Wabco shares are up around 53%.

chart

The company has a lot to show in terms of financials. It has reported steady revenues and profits over the years. It has zero debt on its balance sheet.

Given its monopoly status and good financials, mutual funds seem to be bullish on the stock. They have increased their stake in the company over the past four quarters.

To know more, check out Wabco India's latest shareholding pattern.

Update: Wabco India is now renamed to ZF Commercial Vehicle Control Systems.

In 2022, fundamentally strong stocks, and even the bluest of blue-chip stocks fell hard. But Wabco India stood tall and is currently trading near its 52-week high.

See the advantage of monopoly stocks? They tend to do well during volatile period.

To know more, check out Wabco India's 2021-22 annual report analysis.

#2 Coal India

With around 80% market share in coal production in India, Coal India is one such public sector undertaking (PSU) which makes this list.

Coal India possesses 48% of its reserves and accounted for around 83% of India's total coal production for fiscal 2021. In India, 57% of the primary commercial energy is coal-dependent and Coal India alone meets to the tune of 40% of primary commercial energy requirements.

While the government ended the monopoly status of Coal India in Budget 2020, the company still holds a dominant position in market.

In last year's budget, Finance Minister Nirmala Sitharaman announced commercial mining of coal by the private sector which ended Coal India's monopoly.

The above move did not hurt Coal India as it was falling short of targets. The nation imports coal to meet the shortfall even as demand is expected to grow at 5%.

With the world's largest coal reserves, Coal India has abundant resources. Yet, the company consistently fails to meet the demand and overall expectations. What more, it has not been able to meet its revised targets either.

As Coal India's monopoly ended, it boosted its output. The company appointed contractors for 15 new mines to meet its targets.

In the past year, shares of the company have underperformed benchmark indices and gained just 8%.

chart

Even with good financials and a track record of strong dividend yields, the company has the reputation of underperformance (like ITC).

In the last ten years, Coal India has paid 18 dividends. Its dividend yield stands at over 10%.

Update: Coal India currently trades near its 52-week high levels. Despite 2022's volatility, Coal India has stood tall and has a strong outlook.

Coal India - one of the most unloved stocks in recent years, has defied the market trend and proven that it is not a dead stock.

Along with capital appreciation, Coal India is a dividend paymaster, and is known for making big dividend payouts.

Despite India's renewable energy push, we believe Coal is here to stay. It forms a critical part of India's economy as the largest coal supplier to India's power sector.

To know more, check out Coal India's 2021-22 annual report analysis.

#3 Asahi India Glass

Third on the list we have Asahi India Glass - India's leading value-added and integrated glass solutions company. It's a dominant player, both in the automotive and architectural glass.

Asahi India provides end to end solutions in the entire glass value chain - from the manufacturing of float glass, processing, fabrication, and installation.

It has around 70% market share in automotive glass segment. Nearly three out of every four cars, SUVs, and MUVs manufactured in India has the company's glass.

With this dominant position in the Indian auto glass market, the company is recognised as a go to supplier. Its customers include Maruti Suzuki who is also its promoter, Hyundai Motors, Tata Motors, Mahindra, Toyota, MG, Renault, and many more.

While the company has good track record on the financials front, debt is the only worry. Over the years, Asahi India Glass has taken more debt on its books than equity.

Its debt to equity ratio has stayed above 1 for the past 16 years. At one point in 2013, the debt to equity ratio even ballooned to 38.6! That's massive.

An important point to note here is that the company is consistently reducing debt.

Over the past one year, shares of the company have gained 75%.

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The stock could rally some more as demand outlook for the architectural glass has improved with the revival in residential real-estate demand.

#4 IndiaMART InterMESH

Established in 1999, IndiaMART InterMESH is the largest B2B online market space connecting buyers with sellers. It enjoys more than 55% market share in India's online B2B classified space.

The company provides a platform for small and medium enterprises as well as individuals to showcase their products and services on digital platforms. Today, the company boasts of a portfolio of 120 m plus buyers, 6.4 m suppliers, and 71 m listed products and services.

Since its listing on the bourses, the stock of IndiaMART InterMESH has had a great run. In February this year, shares of the company soared to Rs 9,950 from the issue price of Rs 973.

That's almost 10x gains. But the stock has come under pressure of late.

India's only listed B2B marketplace is facing near-term challenges with medium and small enterprises, which form the bulk of its client base.

chart

The company's client additions have gone down due to lockdowns, which are taking a toll on the stock.

Still, IndiaMART's near-monopolistic nature and its unique business has won the favor of investors. The company is cash positive and carries no debt. Its sales and profits have grown consistently for the past five years, with one exceptional year.

To know more, check out IndiaMART's financial factsheet and latest quarterly results.

Update: The year gone by was tough for IndiaMART Intermesh which is reflected in its share price.

Shares of the company have continuously fallen this year and currently trade at Rs 4,386, near its 52-week low of Rs 3,676.

The company's margin declined in financial year 2021-22 primarily due to investments being made for growth in manpower as well as sales and distribution.

This has resulted into increased customer addition.

The company recently bought back 160,000 equity shares from its existing shareholders, through tender offer route at Rs 6,250 per equity share.

The company is debt free, and a fundamentally strong stock to keep on your watchlist.

#5 Delta Corp

Delta Corp is the largest gaming company in India. It's also the only listed Indian gaming company.

The company has a dominant presence in Goa's offshore casino market. It has around 55% market share in the organised casino market in India with three major areas of business.

Apart from this, the company has also forayed into online gaming, with the acquisition of Adda52.com.

As the company has a first mover advantage, it enjoys synergies of opening up new casinos at locations. Getting the necessary approvals in its business is very tough and this is great for the company as there's almost no competition.

The centre is unlikely to issue new licenses to new players. Also, land-based casinos are allowed only in five-star hotels. So Delta holds a competitive advantage here.

The company has not yet received permission for its casino in Daman. If it gets approval, its revenues will go up.

India has allowed entry for vaccinated tourists from 99 countries and opened borders after nearly two years. This is beneficial for the beleaguered hospitality sector and for a stock like Delta Corp.

The company has massive operations in Goa, a state that's a favorite with foreign tourists. As more tourists pour into Goa, the higher are likely to be the footfalls for Delta Corp.

Ace investor Rakesh Jhunjhunwala has been holding on to this stock in his portfolio for several years now. He acquired 12.5 lakh shares in the company through a bulk deal back in 2016 at an average price of Rs 106.54.

To know more, check out Delta Corp's latest shareholding pattern.

Update: From a high of Rs 333 in April this year, shares of Delta Corp have slipped over 50% this year and currently trade at Rs 190.

Delta Corp yet again posted weak financial results in April 2022, starting the downward trend in the share price.

Adding fuel to the flame, seasoned investor Rakesh Jhunjhunwala sold 2.5 m shares nearly 0.9% stake through open market transactions from 27 May to 31 May.

Promoter holding has also declined in the company.

#6 Bajaj Consumer Care

Bajaj Consumer Care is a dominant player in India's hair oil industry, with a pan-India presence, well-diversified product basket and multiple brands.

Its flagship brand - Bajaj Almond Drops Hair Oil is a leading name in the Hair Oil market.

In the light hair oil (LHO) category, Bajaj Consumer has maintained its dominance over the years. As per its annual report, the company's market share in this category has increased by 1.9% to 62.5% in fiscal 2021. This give it a monopolistic status in the LHO category.

However, it's not just a LHO player anymore and has expanded reach by foraying into coconut and amla hair oil categories with Bajaj Amla Aloe Vera Hair Oil and Bajaj Pure Coconut Hair Oil.

The hair oil (coconut and non-coconut) industry in India is the second largest personal care category, valued at nearly Rs 128 bn. Marico, Bajaj Consumer Care, and Dabur command around 62%-63% of the market share.

This year, Bajaj Consumer achieved the highest-ever value market share of 11.1% in the total hair oil market. The company is among the top dividend paying companies having paid Rs 8-9 per share average dividend in the last 10 years. For fiscal 2021, two thirds of profit were paid out as dividend.

Despite the monopolistic status, shares of Bajaj Consumer have underperformed. Have a look at the company's performance over the past five years.

chart

While the industry itself is not a fast growing one and is at one of its lowest points in terms of growth at present, there is a substantial scope for the top players with deep pockets to increase market share at the cost of other local brands, and outgrow the industry.

Update: Bajaj Consumer should be on your watchlist as the company is planning to shift its focus from diversified product-based business model to its core products.

It also aims to double the market share in the hair oil market over next 4 years and has roped in Bain Capital to help it execute the strategy.

To know more, check out Bajaj Consumer 2021-22 annual report analysis.

Are all monopolies risk free?

A simple answer to this question would be a firm No.

Why?

There have been cases in the past where companies enjoying monopoly went bust when there was a stiff competition.

As Tanushree Banerjee, co-head of Research at Equitymaster, rightly pointed out in one of her editorials, to think that all monopolies are risk free is a huge mistake.

Here's an excerpt of what she wrote,

  • If you are wondering whether monopolies in India have destroyed wealth, look no further than the public sector units...

    Coal India

    VSNL (bought over by Tata Communications)

    BHEL

    NTPC

    And of course, there are the unlisted ones like Air India which accumulated billions in losses over decades.

    It's not that the private sector monopolies stay untainted. Bharti Airtel lost its wealth creating potential as soon as India's telecom sector saw stiff competition.

    Maruti Suzuki and L&T have struggled to retain their market share over past decade.

    So, it's not the absence of competition or the market share that determines true wealth creating potential of monopolies.

While investing in monopoly businesses, look out for companies with strong moats.

Do take into consideration the company's business's ability to maintain its competitive advantage over its peers.

Overall, evaluate your favourite monopoly stock like any other business, which has chances to fail.

Before signing off, we recommend you check out the below video where Co-head of Research at Equitymaster Tanushree Banerjee talks about the best monopoly stocks to own in 2022.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

Equitymaster requests your view! Post a comment on "6 Near-Monopoly Stocks to Add to Your Watchlist". Click here!

1 Responses to "6 Near-Monopoly Stocks to Add to Your Watchlist"

Kalyan Kumar Sandilya

Aug 14, 2022

gist : monopoly is not a kind of forever stock. moat is there, stock is fair. so investor be ready as weaith creator.

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Equitymaster requests your view! Post a comment on "6 Near-Monopoly Stocks to Add to Your Watchlist". Click here!