Market Share - Simple Yet Key Factor In Investing: Varun Manmohan Kapur, Yes Bank, former president & currently an independent investor
Media Release
New Delhi, Jul 27: Ever thought of co-relating 'Market Share' with equity returns? Varun Kapur, Yes Bank’s former president and currently an independent investor provides light on a simple yet powerful investment idea.
Whether it be debt or equity, in general, the level of risk is lower when investing in bigger companies. This got further exacerbated in the backdrop of the pandemic, smaller companies with their lower levels of resilience and limited sources for raising financing resulted in positive economic outcomes for larger players. Their already high market shares got a further fillip as suppliers, distributors, financiers, customers all resorted to ‘safer’ and ‘trusted’ brands. Apart from growth, this enhanced market share provided a cushion against lock-downs, lowering demand during the pandemic, says Varun Kapur.
This thesis is visible in the outsized returns over the last one year (during which there were 2 lock-downs) generated by these large private players with high market shares in their respective business segments (equity returns mentioned below exclude dividends):
Bajaj Finance – 95%
L&T – 79%
Asian Paints – 74%
Pidilite Industries – 71%
Titan Industries – 63%
Now market share is sticky, owing to the number of intermediaries involved and the ‘trust’ factor, once created gets difficult to displace in the short term. So large caps with large market shares in their segment’s pre-pandemic are expected to yield the benefits of such enhanced market share over the medium term. Certainty of cash flows, vendor payments, debt servicing, employee retention will all play to their benefit. These outsized market shares owing to the pandemic can throw off conventional valuation matrices like P/E, EV/EBITDA as ‘growth’ (despite their already large base) is expected to be high and disproportionate to levels of economic recovery over the medium term.
Varun Kapur says that the above simple yet fundamental theory of investing in large players with high market shares in their respective product segments can continue to result in index beating equity returns over the medium term. The relative degree of safety and higher standards of governance going into these stocks also ensures that the risk taken is moderate with an additional steady income stream in the form of dividends.
So before taking new bets in equities, consider this simplified theory requiring way lesser analysis, diligence and risk taking.
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