Two sides of the coin – Analysing the risk rewards of monopoly company stock

Monopolistic stock refers to the shares of that company which operates with very little or no competition. These companies have the power to dictate the price and supply of the goods, and they can influence industry regulations. It is difficult for new entrants to enter the market because of its higher entry barrier or the low operational capacity of the competitor. 

These companies can be government-owned or private, and they’re usually in sectors like natural resources, defence, and other crucial areas. Some of these companies have a monopoly, meaning they’re the only ones in that industry. They often have low-profit margins, which keeps other companies from entering. The ones already in the market benefit from operating at a large scale. In the pharmaceutical sector, some companies hold a monopoly on certain patented drugs, giving them exclusive rights to produce them. 

Also, because of government regulations, a monopoly exists. Even, the nature of the sector does not allow more than one or two companies to operate. However, it does not mean being a monopoly company you are violating government rules. 

How does a certain stock become a monopolistic stock? 

The stock is declared monopolistic when the company can determine the product’s price and is the only producer. This allows the company to control the selling price of the product. 

Features of Monopoly Stocks in India 

In India, monopoly stocks exist for a few reasons. Some sectors were initially controlled by the government or early private entrants. Also, high barriers like expensive operations deter smaller companies from joining. Monopolies are common in sectors like minerals (Coal India), defence (Hindustan Aeronautics and Bharat Earth Movers), and railways (IRCTC or Indian Railway Catering and Tourism Corporation). 

Monopoly stocks often operate in industries with stable demand and limited competition. This helps them in predictable revenue streams and stable earnings. Many monopolistic stocks often distribute dividends to investors due to their consistent cash flows. 

Do keep in mind that being a monopoly company does not necessarily mean having pricing power in the industry. IRCTC has a monopoly over railway ticket booking, because of its public sector nature which is largely for public goods, and does not enjoy unlimited pricing power. Even Coal India dominates the production of solid fuel and does not enjoy pricing power. 

Also, a private player like Balaji Amines, a speciality chemical producer, which is the largest seller of many amine products, has a dominant market share in the country with a competitive advantage. 

List of Some Monopolistic Companies Owned by Government and Private Players

Benefits of Investing in Monopolistic Stocks 

Stability and Predictability: These stocks often have stable revenue streams and earnings due to their dominance in the market which creates steady demand for the product, which gives steady returns to the investor. 

Dividend Income: These stocks have steady cash flow into the business. For income-seeking investors, the monopoly companies give more dividends than other competitive industries’ stock. 

Capital Appreciation: Due to their market dominance, these stocks continue to capture their market share in the industry, which leads to long-term capital appreciation of the stock. 

If the company is government-owned or state-owned, investors can be assured that the monopoly status will continue for longer. 

Risk of Investing in Monopolistic Stocks  

Regulatory Implications: Monopoly companies are sensitive to regulatory changes which impact their operations and profitability and are often under scrutiny. 

For example: Coal India Limited (CIL) (80% of India’s coal production), is heavily regulated by the government because of its power generation and industrial activities. 

The government might set production limits on the company, due to environmental regulations regarding coal mining and pollution control which affects the CIL’s operations and costs. 

Valuation Concern

These stocks are usually overvalued due to investors having belief that they will continue to be a monopoly for longer. 

Lack of innovations 

Due to lack of competition, companies are investing less in innovations in the company, hindering long-term growth.  

Factors to Consider While Investing in Monopolistic Stocks 

• One must understand how long this stock will be in monopoly in the industry, if there is any sunset clause the government has set and be informed of the regulatory changes made in the industry or sector.  
• Understand the degree of threat from potential and emerging competitors because if it’s a high margin monopoly, new entrants will be willing to enter given the attractive margins. 
• Also, when the investor sentiments or worldwide opinions have become against the sector/industry/ company, it becomes less attractive to the investors to invest. 

Conclusion 

Monopolistic company stocks are in industries with little or no competition and high entry barriers. Investors should be aware of the risks and returns before investing in these companies.