Top 4 companies that are strong monopolies

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Lower competition equals higher profits.

However, it is not easy to find companies with these characteristics because high profitability always attracts new players.

Since it is the era of mega-companies, companies with a dominant position in the market could become monopolies eliminating the advantages of competition.

Here is a look at four Indian listed companies that enjoy strong monopolies.

# 1 IRCTC

Indian Railway Catering and Tourism Corp (IRCTC), which entered primary markets by listing in October 2019, enjoys a strong monopoly. It holds 100% of the market share on the rail network.

The IRCTC is the only entity authorized by Indian Railways to offer train tickets online. The company charges a convenience fee in the range of ₹15-30 per ticket.

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Data source: IRCTC annual report

It is also the only entity authorized to manage catering services on board trains and large stationary sets.

The company also enjoys a monopoly on conditioned drinking water. It is the only entity authorized by the Ministry of Railways to manufacture and distribute conditioned drinking water in all stations and trains under the “Rail Neer” brand.

When the public offering was released, investors showed keen interest. Its IPO was 112 times oversubscribed – the highest for an IPO of a public company.

The company has experienced promising growth over the past five years.

Its revenue increased by 11.5% CAGR between fiscal 2016 and fiscal 2020. Profits grew at a CAGR of 28% during the same period.

In addition, the company is debt free and has reserves of 11.7 billion rupees as of March 2020.

All of these positives are largely reflected in its share price, which has risen up to 5 times since its initial public offering (IPO).

IRCTC share performance

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IRCTC share performance

Here’s what Tanushree Banerjee, co-head of research at Equitymaster and editor of the premium Forever Stocks recommendation service, has to say about the company.

Although it is a PSU, the IRCTC has a wide gap that few other travel and tourism companies can claim to have. Electronic tickets booked online through the IRCTC website and app accounted for 72.25% of total tickets booked on Indian Railways in fiscal 2020. On average, about 0.8 million tickets were sold. been booked daily through the IRCTC website and app during this year. In addition, the growth of the restaurant business appears to be firmly established. During the year, IRCTC managed on-board catering services in 19 Rajdhanis, 2 Tejas, 1 Gatiman, 1 Vande Bharat, 22 Shatabdis, 19 Durontos and 296 Mail Express trains.

It remains to be seen how IRCTC actions will perform in the coming months as rail services gradually open up.

# 2 IEX

Indian Energy Exchange (IEX) and Power Exchange of India (PXIL) are the country’s two nodal electricity exchanges.

IEX represents 95% of short-term electricity contracts (i.e. contracts of less than one year) traded on stock exchanges in India. A virtual monopoly.

It is important to understand the nature of the forex market. Whether it is exchanges like NSE or BSE, or whether it is CDSL or NSDL depositories, exchanges are always characterized by a monopoly or a duopoly.

Why is this so?

This is because of the network effect.

Think of it like this. You are a buyer or seller and know that everyone is on the stock market. Why would you want to switch to another new exchange?

The first player advantage is important in such cases. IEX being the first to have the majority of volumes on the exchange.

More participants means more efficiency and better price discovery. New participants are always likely to prefer the leader in such cases.

# 3 CAM

If you have been an investor in mutual funds, surely you would have encountered or viewed CAMS account statements.

Compute Age Management Services (CAMS) has been a technology-driven provider of financial infrastructure and services to mutual funds and other financial institutions for more than two decades.

It is the largest mutual fund registrar and transfer agent in India with an overall market share of around 70% based on the average assets under management of mutual funds (AAUM) managed by its clients and managed by them.

The second player, Karvy, has a market share that is far from 26%.

Over the past five years, the company has grown its market share from around 61% in March 2015 to around 70% in December 2020, based on the AAUM served.

In addition to being a mutual fund registrar, CAMS also offers alternative investment fund solutions and portfolio management services.

It has a 40% market share as an insurance benchmark.

Mutual fund registrars market share.

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Mutual fund registrars market share.

# 4 CDSL

Central Depository Services (CDSL) is the only listed depository in India and a major beneficiary of structural growth in capital markets.

There are only two custodians in India, the other being NSDL which is not yet listed.

As a securities depository, CDSL facilitates the holding of securities in digital form and enables the processing of securities transactions (including transfer and off-market pledging) by book entry.

It generates income from annual issue costs (annuity nature of the income), transaction costs (market dependent), IPO / activity costs, online data costs (via its subsidiary CDSL Ventures) and others.

The company’s shares have risen 250% in the past year. What is interesting to know is that before that, its share price was moving in a consolidated manner.

CDSL share performance.

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CDSL share performance.

The increase in demat accounts is one of the main reasons for the rally. Company profits have increased since the Covid-19 pandemic.

Additions of new demat accounts reached a record 10.7 million between April 2020 and January 2021. This is more than a double increase of new accounts opened in fiscal year 2020 to 4.7 millions.

And CDSL derives a large portion (about 60%) of its income directly or indirectly from mat accounts.

Data source: Livemint

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Data source: Livemint

Invest in monopolies

Although much has been said about investing in such businesses, you need to consider whether the business can remain profitable in the future.

Moreover, without the absence of government support, monopolies are difficult to establish and maintain.

Read our op-ed on MTNL, the monopoly player in 2002, and how it went from no-debt to heavily indebted, and also lost 88% of its market capitalization.

Legendary investor Warren Buffett has always discussed the idea of ​​investing in companies with a moat.

A moat in general is a wide and deep moat surrounding a castle, fort, or town, usually filled with water and intended as a defense against attack.

By investing, it refers to the ability of a company to maintain its competitive advantage over its peers in order to protect its market share and ensure sustained profits.

The wider the gap, the stronger the company. If the gap is small, the competition will eventually spoil the game, erode returns, and take away market share and profits over time.

Therefore, a smart way to invest is to choose companies with a strong moat.

Of course, you also need to look at the valuations of the business as well as its intrinsic value and margin of safety.

Good investment!

(This article is syndicated from Equitymaster.com)

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