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Anindya Sengupta & Anshuman Tiwari
Like so many other middle-class Indians, Sameer also started dabbling in the stock market since the first lockdown began in March 2020. He had been wondering how the market, especially the top stocks, could recover so swiftly even though the real economy had crashed. One day, he sat down with his college friend, Kapil, to better understand the stock rally. Kapil had been in the stock market for many years now. After working with an investment firm, he started his own Portfolio Management Service (PMS) a few years back.
Kapil explained to Sameer that beyond the noise of the everyday ups and downs, it was a handful of companies that had been rising mainly because the ongoing crisis would allow them to grab further market share. The deeper the crisis for Vodafone, the larger the profit for Reliance Jio and Bharti Airtel, given that India’s telecommunications universe was now limited to just these three. Similarly, even if the Indian retail pie did not grow, Reliance’s share in that pie increased substantially in recent months.
Often, profit of such monopolies rose not because of market expansion, but by killing competition. Kapil advised Sameer to buy Reliance and a few other well-capitalised retail stocks. He explained that eventually, shoppers would come back and organised retail would continue to grow, but now the profit would be shared by a smaller number of companies. Kapil told Sameer that he would make more money in stocks if he looked mainly at monopolies or duopolies. Today in India, he explained from butter to chocolate, one to three companies controlled almost the entire spectrum of everyday items.
Sameer was a bit sceptical, so Kapil smiled and asked Sameer and his wife about their choice of brands. Like most middle-class families, their choices were limited to duopolies like Parle and Britannia (biscuits), Marico and Dabur (hair oil), Marico and Adani (cooking oil) and monopolies like Nestle (97 per cent market share in baby food) and Page Industries (innerwear).
According to Marcellus, a Mumbai-based investment firm, in India, 20–25 such companies monopolise 80 per cent or more profits in their respective categories (in most economies, a market share of 15 per cent is considered as leadership positions). The story was the same among the unlisted companies—Ola and Uber in ride-hailing services, Amazon or Flipkart in general e-commerce and BigBasket or Grofers in online groceries.
Rise of Super Monopolies
Heeding his friend’s advice, Sameer not only invested in some of these companies but was also astonished to discover the tremendous amount of concentration of business in India. Marcellus reported that the top 20 companies in India accounted for nearly 70 per cent of the total corporate earnings in 2019 (in comparison, in the US, where both the authorities and consumers are deeply concerned about rising monopolies, top 20 firms accounted for roughly 25 per cent of total corporate profit). Some features of this extraordinary concentration were apparent to Sameer—some of these companies, like public sector banks or monopolies like Coal India, were the last vestiges of the pre-1991 control-permit raj. A few areas, such as petroleum retail, gas, rail, coal and most of the electricity generation and distribution, continued to be government monopolies.
The second group of companies came from the clean sectors of the economy and were well-managed. They could either borrow at a significantly less cost than their peers, like HDFC Bank, or were cash-rich themselves, like IT behemoths Infosys and TCS and consumer goods giant ITC. Companies like Reliance (in fact, Reliance was the only company to have featured in the list of top 20 profit earners every year since 1992) came in the third bucket, where the main qualification seems to be the ability to negotiate with Indian political and regulatory systems. Sameer felt quite excited and told Kapil over the phone that he wanted some more clarifications. Kapil laughed and invited him for drinks the following Saturday when he and Shweta already had a Zoom session scheduled.
Matsyanyay: The Law of Fishes
During college days, Shweta, Kapil and Sameer would often hang out together. After her MBA, Shweta decided to go into academics. Now she taught at a business school in the US. Sameer, at times, met her in Mumbai but did not know that Shweta and Kapil had been collaborating on both research and investment. After raising a toast to their friendship, Sameer said that he had two basic questions—one, how had Indian businesses reached this level of concentration and two, what would the fall-outs be?
Kapil began by narrating the story of a hair-care brand called Indulekha. It was a successful regional brand in Kerala and Tamil Nadu. In 2016, Hindustan Unilever paid ₹350 crore to acquire this brand. They then made it a pan-India brand and launched new products under this brand name. In just three years, Indulekha became a ₹2,000 crore brand for Hindustan Unilever. Kapil could give many such examples, like ITC buying a small Kolkata-based brand called Nimyle and replicating the same formula. Or the acquisition of the popular Lal Ghoda and Kala Ghoda brands of tea by the Tatas. Then there was Relaxo, undisputed leader of the organised hawai chappal (bathroom slippers) market. Relaxo had been growing mostly at the expense of smaller companies who could not scale up their brand-building or distribution network or withstand the Demonetisation–GST onslaught. So essentially, over the last decade or so, a huge expansion in highways, cheap domestic flights, mobile telephones, broadband networks and media penetration helped in the emergence of a networked economy. Efficient corporates with large pan-India distribution networks took advantage of this networked economy and the expected consumer shift from informal to formal.
Sameer asked whether this was always a one-way street. Kapil told him that there were a few examples of regional players reinventing themselves as national leaders, such as La Opala and Kajaria Ceramics. But generally, smaller companies faced disproportionately higher regulatory burdens and lagged behind in terms of investment in technology. However, the most important factor for these companies was that of the cost of capital. Cash-rich private companies could raise capital at 2 percentage point or more lower than their smaller competitors, effectively throwing them out of the ring (private corporates paid an average interest of 9.25 per cent on credit in India, roughly three times more than the average American corporates). Once these companies built large, profitable franchises, they kept expanding into nearby areas. He explained how from housing finance, HDFC built a great bank and subsequently went into insurance and asset management.
‘So, to come back to my bottom line, if you want to make money in Indian stock market, keep investing in monopolies,’ Kapil concluded with a chuckle. Shweta laughed and added that she had always admired Kapil’s insights but it was not right to always look at economic trends through the prism of stock prices. She went on to explain that in recent years, globalisation and technological advances concentrated economic activities and corporate profit in a small number of firms in every economy. But India is the only large economy where several sectors are completely dominated by just one or two players. In well-regulated markets, extraordinary returns attract competition and, in that manner, the return gets moderated. Policy and governance failures in India, however, conspired against the small domestic firms from acquiring any significant scale on the one hand and on the other, kept new competition and foreign companies at bay.
(Anshuman Tiwari is an economic commentator, author, and an award-winning journalist. Anindya Sengupta is a public policy analyst and a student of economic history. This excerpt is reprinted with permission from Bloomsbury India)
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