Four small-cap monopoly stocks to add to your watchlist
Premium- Investing in monopoly business is a smart investment. Even if other companies or startups threaten industry disruption, it won’t happen overnight.
With the absence of intense competition in an industry, a company is poised to do better and generate profits with strong cash flows.
Lower Competition = Higher Profits
However, it's not easy to find companies with these characteristics. High profitability always attracts new players.
While very few companies have a true monopoly, more common are near-monopolies. These exist due to their brand recognition or they have a dominance in any particular geography.
In today’s article, we look at four Indian smallcap companies which enjoy strong monopolies.
These smallcap companies are leaders in their category by quite a stretch.
#1 NOCIL
NOCIL is the largest rubber chemical manufacturing company with 40% market share in India.
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The company is among the few players globally with a wide product basket of 22 rubber chemicals. It has been able to maintain healthy relationships with major domestic and global tyre manufacturers for over 40 years.
These long-term relationships include with Apollo, MRF, JK, Fiat, Ceat, Michelin, Bridgestone, Yokohama rubber, Sumitomo Rubber, Continental etc.
Over the past couple of years, NOCIL is enjoying increased share of business from overseas customers as they take comfort with China plus one strategy.
Further, the company is set to see increased revenues in the ongoing fiscal year as it has ramped up newly added capacities, taken consistent price hikes and due to increased share from export markets.
There is barely any pricing power in the industry which NOCIL operates. Most of the growth is determined by the volumes a company is able to sell and the basket of products it can offer. Keeping costs low is how NOCIL has made a killing.
On top of this, the company has paid consistent dividends over the years and is also debt free. Without taking on any debt for its capex plan, NOCIL has doubled its capacity to 110,000 tonnes.
No wonder it has done well on the bourses.
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#2 Oriental Carbon & Chemicals
Oriental Carbon & Chemicals is the sole manufacturer of insoluble Sulphur (IS) in the domestic market. It has a leadership position in the domestic market with nearly 55%-60% of the market share and around 10% market share in the global market.
IS used to 'vulcanize' rubber that finally goes into manufacturing tyres. Vulcanisation is nothing but heating rubber with Sulphur.
IS comprises a miniscule percentage of the tyre cost, yet is critical to the functionality, life, and quality of a tyre. The process is highly technical and capital intensive in nature. The approval process is also stringent and exhaustive, that could take a couple of years. Oriental Carbon is the only domestic player in this niche segment.
From a modest capacity of 3,000 MT per annum in 1994, the current capacity for IS stands at 34,000 MTPA.
Oriental Carbon enjoys market leadership as it has continuously done capacity expansion. The company also boasts of strong financials and strong inhouse R&D.
A month ago, the company informed that it has commissioned the first phase (5,500 MTPA capacity) of its project for expansion of IS production capacity at Dharuhera, Haryana.
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Despite all these positives, shares of the company have been muted over the year gone by with major selling pressure coming in the month of January 2022.
Presently, Oriental Carbon shares are trading around 10% higher from their 52-week high.
#3 Mold-Tek Packaging
Mold Tek Packaging is one of the leaders in rigid plastic packaging in India. It’s the only Indian company that makes in-house robots for its in mold labeling (IML) operations.
Further, it’s also the only packaging company which is completely backward integrated.
Today, its clientele comprises of marquee FMCG and paint companies like Asian Paints, Kansai Nerolac, Castrol, Mondelez, HUL and many more. Asian Paints has always been a big customer.
Mold Tek Packaging has always stayed ahead of competition by adopting to latest trends and investing in R&D to develop in-house capabilities to implement the same at a lower cost.
And if the above reasons were not compelling enough, just look at the table below which shows Mold Tek’s financials.
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Mold Tek has repeatedly reported healthy profit margins. In the last few years, it witnessed revenue growth and margin improvement aided by repeat orders from the existing customers, new customer acquisition in food segments and favourable shift in product mix.
Therefore, this should come as no surprise that the company’s stock has returned multibagger returns in the year gone by.
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The company has now forayed into the injection blow molding (IBM) segment to cater to the unique packaging requirements of the pharma and personal care (cosmetics) sectors. For this, it has drawn up plans to invest over ₹2 bn in setting up new capacities.
#4 Triton Valves
Triton Valves is the leader in the domestic automotive tube valves and cores segment with 75% market share.
It supplies to almost all key tyre manufacturers in India, including MRF, Apollo Tyres, JK Tyre, and Industries and Ceat.
The company has a long-established track record of paying consistent and increasing dividends over the years. For fiscal 2021, it had declared a dividend of ₹20 on its face value of ₹10.
Triton’s only concern for the time is its debt level. The company has around ₹1 bn in debt which pushed its debt to equity ratio above 1. The company is also expected to undertake capex of about ₹150 m in fiscal 2022 which will be partly debt funded.
The stock is under pressure lately after the company reported losses in June and September 2021 quarters.
Over the year gone by, shares of the company have gained 28%.
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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.
That is why, you must investigate if the company can remain profitable for the future.
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.
Do note that investing in monopoly business is a smart investment because even if any other company or startup threatens industry disruption, that doesn’t happen overnight.
For now, that’s all from our side. In the coming weeks, we’ll be back with another set of smallcap companies which are leaders in their category.
Happy Investing!
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
(This article is syndicated from Equitymaster.com)
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