Monopolies are the main agents of positive change in Indian society, says Mr Saurabh Mukherjea, Founder and Chief Investment Officer, Marcelllus Investment Managers. "The rise of monopolies in India is giving India a better deal," he said in AIMA's LeaderSpeak programme.
The session was moderated by Mr TV Mohandas Pai, Chairman, Manipal Global Education, and it was anchored by Ms Rekha Sethi, Director General, AIMA.
Mr Mukherjea argues that the disapproval of monopolies is a result of the socialist legacy of India, but that would change as India embraces capitalism. He says that most of the sectors of Indian industry are dominated by monopolies and the monopolists are the source of investment, innovation and wealth creation. He points out that NBFCs, small cars, paints, adhesives, biscuits, baby milk powder, hair oil, cooking oil, pharma APIs, health diagnostics etc are among the sectors that have monopolies.
According to Mr Mukherjea's research, the top 20 companies in India generate 70% of the profits of the corporate sector and their share will only increase in the future. He says that in 1992-93, the top 20 companies accounted for only 15% of the total profits. In fact, he says, the top two companies in most sectors take 85% of the sector's profits. The reason they can do so is that they have larger free cash flows and they reinvest two-thirds of the profits into growth and building barriers against competition. "The large swathes of Indian economy are controlled by 20-25 families," he says.
The way to build a monopoly is to enter an ignored niche, dominate that, generate large cash flows to expand into the mainstream market, says Mr Mukherjea. He argues that price wars are not a route to a monopoly but having a secret insight into the market is. He says that the paint and the NBFC monopoly are actually data companies with superior market intelligence, which allows them to create and control segments and corner the best customers.
The monopoly builders are always quiet, focused people who shy away from media and do not buy sports teams or associate with film stars once they get rich, according to Mr Mukherjea.
Mr Pai pointed out that monopolies were seen as a danger to the society that distort markets by destroying competition and often make obscene profits. He mentioned that IT companies were not monopolies and yet they grew fast and generated huge returns.
Mr Mukherjea argues that true monopolists' strategy is to hold prices down to destroy their competitors. He says that most Indian monopolies raise prices by 1-2% every year, at a rate much lower than the rate of inflation, which drains their competitors. "By increasing prices slowly, monopolies suffocate the rivals," he says. However, he adds, such monopolies are great for the customers who get a much better deal.
In 10 years, says Mr Mukherjea, India will have 20 odd giant companies that will dominate the economy and they will sustain thousands of suppliers and innovators. The innovative suppliers will be acquired by the monopoly corporations. Eventually, India will have the Japanese and Korean model of corporate economy, he says.
More than 1,000 people participated in the session.