Stock Shastra #7: A company with Exclusive control can charge a toll

We have been talking about the various competitive advantages (moats) that a business can have. A couple of them are great brands and patents/secrets which we covered earlier. We said in Stock Shastra #6 that Patents/Trade Secrets make a company the only one who can produce a particular product which can lead to higher sales and profits. Another competitive advantage possessed by only a few companies is the exclusive control over a product category or area.

So, how does having an exclusive control help?

The answer to this is Stock Shastra #7: A company with Exclusive control can charge a toll.

If you are 40+ you will remember the days when owning a two-wheeler or a telephone was considered a privilege. If you wanted to buy a two-wheeler you had to buy a Bajaj Scooter and if you wanted a telephone, BSNL was your only option. Forget about product quality or customer centricity. There was a huge waiting list if you wanted to buy either. The license Raj had resulted in these companies getting an exclusive control and becoming the only choice for consumers. However this control was lost after liberalization. These companies had an exclusive control over their product category.

Now, consider Sun TV. If you want to advertise a product in Tamil Nadu on a television network, you would have no real option but to advertise on Sun TV, because of the very high viewership it commands in that state and the absence of a worthwhile second option. Thus, companies can also have an exclusive control of a particular area; much like the ‘dada’ in a Bollywood movie, who controls a particular area in a city..

This exclusive control over a particular product/service or an area gives a company an ability to charge a toll, a premium.

How does this ability to charge a toll translate into higher profits?

If a company has an exclusive control of a product or an area it virtually becomes a monopoly and can charge a premium. The biggest advantage that a company gets is high sales, as there is no substantial competition that it faces. The customers have to come to the company for its products or services. As a result the company can command a premium and not worry about lowering prices due to competitive pressures. This ensures higher margins and high profits. As the company becomes bigger it gets the advantage of economies of scale and the company’s average costs fall. The company can then maintain prices and increase their margin further, which means even higher profits. The ability to charge a toll thus ensures almost secured profits for a company.

Which companies in India have this advantage?

Today, having an exclusive control has become a rarity due to liberalization. However, some companies do get an exclusive control in certain cases e.g.  utility and media companies.

Take for example newspaper companies. Times of India is the most widely read English language newspaper with a readership of around 13.5 million. So, if you had to advertise in an English newspaper, especially in Mumbai, Times of India would be an inevitable option. Likewise, Dainik Jagran (with a Readership of 56 million), commands a position of toll in Hindi Speaking states.

Another similar example is that of credit rating companies like CRISIL or ICRA. If any company wanted to get a rating done for its debt and credit facilities it would have no option but to go these companies. This exclusive control is reflected in the financial track record of these companies especially CRISIL which has managed to post robust growth.

Hindustan Zinc Ltd. is a company which has exclusive mining rights thus collecting a toll for its products. The company has infact made the most of this competitive advantage to record good growth in Sales and EPS. Check this company out in Company Shastra.

In Stock Shastra #8 we will talk about another interesting moat, Switching – Having products that customers have difficulty in switching over from.

Take for example newspaper companies. Times of India is the most widely read English language newspaper with a readership of around 13.5 million. So, if you had to advertise in an English newspaper, especially in Mumbai, Times of India would be an inevitable option. Likewise, Dainik Jagran (with a Readership of 56 million), commands a position of toll in Hindi Speaking states.

Another similar example is that of credit rating companies like CRISIL or ICRA. If any company wanted to get a rating done for its debt and credit facilities it would have no option but to go these companies. This exclusive control is reflected in the financial track record of these companies especially CRISIL which has managed to post robust growth.

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