What’s in a Name?
Much like the board game, this portfolio’s sole intention is to locate companies that have a monopolistic advantage over their competitors in their respective fields, backed by empirical growth in the form of their revenue and market share.
A few of these companies’ names might be at the tip of your tongue - ITC for their cigarette dominance, IRCTC for their 100% market share in the railway ticketing sector, and Coal India (for obvious reasons). Unfortunately, these companies haven’t performed as well as the market may have hoped. That’s where we come in - finding the companies that do.
Fun fact : Did you know that EPL is a global market leader (36% market share) in toothpaste tubes and Acrysil is the country’s leading granite composite sink manufacturer? They are a part of the Monopolies portfolio, and for good reason!
As phrased beautifully by Cardi Bi, “All I wanna see is the money”.
Although pretty self-explanatory, let’s delve into simplifying this even further. Let’s assume that you are a new parent (congratulations!). Here are a few monopolies you might encounter:
Your baby will eventually consume semi-solid food, at which point your doctor and every aunty in sight will tell you to buy Cerelac. Nestle owns this and has captured 96.5% of the instant cereal market!
Since you can’t eat the same food (and enjoy the fried indulgences of Indian cuisine), you rush to get a bottle of Saffola. On the way, you realise you need Parachute as well, since your baby is ripping your hair out. Marico, who owns both brands, has cornered a neat 73% of the personal use oil products market of the nation.
With a single grocery run, you encountered 2 monopolies, yet you made no money from their growth since you didn’t invest in our Monopolies portfolio.
Recipe for the Dough 💸
Look for companies that possess a significant market share in the industry they hail from
Once identified, jot down the key competitive edges these companies have over their competitors - whether it’s their superior product, seamless management or first mover advantage!
Back up their title of being an industry leader with metrics of their growth, profitability, capital, etc.
Ensure there are enough tailwinds for the industry. A winner in a losing market is no better than a loser in a winning market.
Rinse and repeat till a collated dream team is created that ranges across industries, fuelling diversification.
Prove that the strategy will flourish by collecting empirical evidence and testing it against a decade-long historical dataset.
Ascertain how many stocks of each company to invest by a process called weighting. We do this on the basis of market capitalisation, management quality, and their vision for excellence, backed by earnings.
Monitor their progress, or lack thereof and make adjustments to the portfolio accordingly (Rebalance).
Skin in the Game
Still not convinced? Let’s take the example of an age-old, household name that you will be awestruck by - Asian Paints.
Established in 1942, at a time when World War II was still in full force, our nation hadn’t gained independence from the British and the paint business wasn’t as “colourful” (see what we did there?) as it is today. The situation was as dire as it could’ve been, yet Champaklal Choksey and 3 of his friends decided to take up the mantle of domestic paint production, birthing Asian Paints Ltd.
Here are some numbers for you to gape at:
Revenue CAGR of 33% over the last 20 years
If you had invested Rs. 100 in 2000, your wealth would be Rs. 18,700 in 2021
It is the 9th largest paint manufacturer in the world, possesses 50% market share of the Indian paint industry
This enormous feat was accomplished by factors that continue to make them a monopolistic giant in their sector:
Initially, they sold directly to rural consumers via village distributors (after being rejected by major distributors) to establish a stronghold. Fun fact: the paint was used to decorate bull horns and entrances of South Indian homes!
They created a product called “washable distemper”, a high quality product that competed directly with the “plastic emulsion” that was at least double the price. This led to astronomical revenue growth between 1952 to 1962 (21% 10Y CAGR) and placed them as the largest paint company in India.
Supply chain management was the name of their next game, which helped them retain their position and propelled their revenues even more. During this era, paint companies provided distributors with their inventory and were asked to pay up within 6 months, which means paint companies may not receive their returns for the entirety of that period, leading to lack of liquid capital.
Asian Paints came up with a scheme wherein if payments were made within 30 days throughout the year, they receive discounts of 3.5% (Regular Payment Performance Discount).
Asian Paints was the first company in the nation to buy a supercomputer, which helped them project demand estimates, and smoothen out any discrepancies in their functioning.
Post this, they implemented their findings, resulting in them needing 1/16th of the earlier required workforce to complete the same quantum of production capacity! Apart from this feat, they negated the need for distributors entirely and supplied their products directly to dealers!
Tinting machines were introduced, wherein the equipment could ascertain the exact proportions of different paint colours to create an entirely different shade, without having to store multiple shades.
Clearly these machines are expensive, yet while other paint companies burdened the dealers to make this purchase, Asian Paints made the investment and leased out the equipment to dealers, establishing an even stronger connection with them.
A culmination of their efforts led to their dealer “family” extending from 15,000 in 2000 to 52,000 in 2018, scaling heights that couldn’t be fathomed. As times changed, they embraced technology further by enhancing their dealer portal, creating a streamlined process, resulting in deliveries arriving within 24 hours!
Their next 10 year plan is already in effect - creating “experience stores” for consumers to gain access to all the tools required to paint their homes themselves, taking the rising labour costs into consideration. They intend to diversify into all-round space beautification - furniture, lighting, waterproofing, interior décor, etc.
These are just a few of the renowned master-”strokes” (okay we’re done now) played by this iconic entity, carving out a chunk of the market for themselves.
Tag along with the Monopolies portfolio for unimaginable profits from monopolies like this one!
Meet Your Maker
Presenting - Mehul Parikh
Mehul has been heading research at S&A Ventures, which is one of the largest brokers and money managers in Gujarat.
He has worked in Motilal Oswal’s institutional research team, in the areas of special products and forensic analysis.
He was has also worked in the core strategy and corporate finance team at Mahindra Group, working directly with the CFO.
He is a CA, who has also articled at DJNV & Co.
Piece Of The Action 🍕
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