This issue of Outside the Box newsletter is authored by Jatin Khemani. Jatin shares his key observations from analyzing market leaders across industries in India.
One common advice I find veteran investors passing on to next-generation investors is to look for companies dominating their industry and enjoying entry barriers ensuring their profit pool share is protected.
Now, ideally, we may think that the top 3-4 players by market share in any category should be qualified as ‘dominant players’ even if their respective market share is in single digit. However, for the purpose of this research, I have restricted my analysis to only those companies that enjoy at least a 35% share in their respective categories.
You must be thinking that it is quite a stringent filter and there would only be a handful of companies that will make it to the list – after all, we are a free economy with enormous capital chasing opportunities on one side and ever-tightening regulations in the form of competition commission etc., on the other.
But you would be surprised to learn that having spent just a couple of days and recollecting about all the companies I have studied or read about over the last decade, I could actually pin down a list of 60 listed companies that enjoy a market share of 35% or higher.
I am sure I must have missed out on many other listed companies and so the list may get longer and even more if one were to include a few unlisted businesses like NSE, a virtual monopoly, or Amul, which boasts of a 40% share of the cheese and other value-add dairy products market.
You would see the complete list at the end of this article. But before that, let me share the top 10 observations while analyzing this distinct sub-set of dominant businesses –
India’s Market Leaders: 10 Key Observations
- 18 companies have sales of less than Rs 1,000 crore (Cr) despite having a lion’s share of the addressable market. This implies that these categories are small in size with limited profit pool. For companies operating in such a tiny pool but with such high market share, it is almost impossible to grow any faster than the category growth. This implies, at best, they would grow in line with the industry. And if we want to see them growing revenues at 15-20% CAGR over the next several years, we must be able to either make a case for similar growth at the industry level or they strategically increasing their addressable market. For instance, La Opala which operates in the opal ware segment has an addressable market of only Rs 500 Cr. and it has already garnered a 50% share. From here on, the category growth is extremely important to support the company’s growth. Further, if at all, the category saturates at these levels, the competitive intensity among incumbents could only increase and in fact dent margins while peers chase growth or attempt to protect market share, which is a double whammy – no topline growth with margin compression. To make it worse, markets often de-rate such stocks and investors end up losing a significant chunk of capital. Same applies for Triton Valves – annual revenues of merely Rs 227 Cr. with a market share of 65%. In the case of Zydus Wellness, whose brand Sugar-Free has a 94% market share in sugar substitute category, the company is practically the category itself but the annual revenue is only Rs 500 Cr.
- Second key observation is that most of these companies are pioneers – Nestle created the instant noodle category in India with its Maggie noodles, and so did Colgate in a country where otherwise everybody was using ‘daatun’ (neem sticks). Marico in the 1980s and 90s created premium edible oils category with its Saffola brand which is now being leveraged to seed newer categories like healthy breakfast (oats). To seed a new category is an extremely long and painstaking process (even loss-making initially) with little odds of success. But when successful, it is very rewarding. Pidilite Industries’ brands have been so strong for generations now, that they literally define the category – users know the product (adhesives) by the brand name (Fevicol, Fevistik, Fevikwik, Dr. Fixit), thanks to those memorable advertisements backed by the widest possible distribution. Asian Paints pioneered the involvement of households in choosing decorative paints while slowly eliminating the painters from being the decision maker. While they have been the market leader since the 1960s, the tinting machines (paint dispensers) which they installed at stores in the 1990s was perhaps the inflection point in getting dealer loyalty as well as offering far more variety to consumers.
- Average age of these 60 companies is about 60 years. Moreover, 18 businesses have been in existence from the pre-independence era. The oldest of the lot is United Spirits (McDowell’s) which is 193 years old, followed by United Breweries (Kingfisher) which is 162 years old. This shows that it takes an enormous amount of time for any business to scale up and attain leadership and that there is simply no shortcut. There are only three businesses that came into existence in the 21st century – MCX (2002), IEX (2006) and Interglobe Aviation (2006). The first two are exchanges which pioneered their respective segments creating virtual monopolies given winner-takes-all characteristic of the business. The unusual name, however, is Interglobe, an airline (Indigo) which came into existence just 13 years ago and today four out of 10 domestic passengers fly Indigo – this might be the only airline globally to have achieved this kind of market share and that too in such a short span of time. It surely did benefit from big incumbents going bust but it also had the ability to dream big and make sizable bets which were followed by remarkable execution.
- Barring a few like HUL and M&M (acquired Swaraj), most of these businesses have grown organically. It is no wonder that given the poor base rate of successful M&As, that the leaders shown in the list have earned and sustained this position through decades and centuries of effort rather than buying market share.
- Few of the segments are winner-takes-all kind of market: MCX (Commodity Exchange), IEX (Power Exchange) and NSE (Stock Exchange) are virtual monopolies given in this business, liquidity attracts liquidity which becomes a virtuous cycle. Some of the auto incumbents also enjoy network effects and scale advantage like Maruti (4W), Bajaj (3W) and Hero (2W) from an ecosystem of ancillaries, sales dealership, service centers and availability of spares – all culminating into trust and reliability.
- There are four companies from so called ‘sin’ sectors (no surprise here) – tobacco (ITC) and liquor (United Spirits, United Breweries and Radico Khaitan) where regulations make it extremely difficult for new entrants to make inroads letting incumbents enjoy high market share from customers who are addicted to their brand.
- In cases like Wabco and Bosch, it is the perhaps the advanced, and in some cases even patented technology which has led to such high market share.
- For all the companies the market shares mentioned are domestic, except Vinati Organics. It is one of the lowest-cost producer of ATBS (a highly versatile molecule used to make polymers) in the world which is why it enjoyed 40% market share globally until recently, a rare feat for any Indian manufacturing company. And then in 2018, it got lucky – Lubrizol, a key competitor with 25% global share decided to exit the industry. This has helped the company increase its market share further. Two more chemical companies make it to the list – Oriental Carbon and NOCIL, both make products that are largely used in tire manufacturing.
- The only PSU to appear in this list, Coal India, is a monopoly created by the Indian government as ownership of all of the country’s coal mines (India has world’s largest coal reserves) are with this entity. Also in some cases, it is very difficult to fathom the true reason behind market dominance. Take for instance Jamna Auto or Setco. Why would they command 70-80% market share in an industry with little to no entry barriers? I think it could simply be a favorable competitive scenario; a lack of interest from any major group to enter and the inability of smaller/unorganized guys to compete, may be due to the relatively small size of opportunity or the associated cyclicality as both supply to Commercial Vehicle OEMs like Tata and Ashok Leyland.
- Over 75% of these businesses are consumer-facing entities, enjoying some sort of brand loyalty and/or distribution advantage. Further, barring six businesses which are service and retail-oriented, rest all of them (90%) are into manufacturing. Lastly, there is no point of having only sales leadership if that doesn’t translate into above-average return on capital employed (ROCE) for the shareholders. So how has this set of companies fared on that metric? To avoid any extremes/one-offs instead of FY18, I pulled FY16-18 average ROCE for each of these businesses. The 3-year average ROCE for the entire set of these companies is an impressive 33.6%.
Overall, I believe, it is an interesting set of companies (click here to download the list) that should find a place on your watch list, which must be carefully watched for any investment opportunities that their stocks may provide going forward.
Note: Annual Revenues are segmental. Where segmental data is not available, consolidated revenues are shown with (C) to indicate the same. Market shares are estimated and sourced from annual reports, industry bodies, credit rating agencies and/or our research. Market share is based on the size of the organized market only.
Disclaimer: This is not a recommendation to Buy/Sell stocks. Rather, the sole purpose is education and information. The author and his colleagues and clients may have investments in stocks discussed.
About the Author: Jatin is the founder and CEO of Stalwart Advisors, a SEBI registered investment advisor.