Boosting portfolio potential with a focus on market share leaders

One of the themes that is expected to play out well, in the next five to ten years, is a focus on market share gainers.

Boosting portfolio potential with a focus on market share leaders
Historically, market share gainers have proved themselves to be long term compounders with examples like Asian Paints registering a market share gain of greater than 100 basis points among the top 5 players in the sector. (Image: REUTERS)

By Manish Vinod

India is on track to achieving accelerated growth over the medium and longer term, owing to the government’s focus on expanding the economy and the sturdy position of top companies. Recent trends suggest that India is poised to see the best decade of growth and transformation, with rising income creating a demand for better goods and services. Further, the rise in internet users is enabling the growth of innovative business models and there is a decisive shift towards the organised sector making strong businesses stronger. In terms of investing, it is important to identify themes and ideas that are well-positioned to capture a lion’s share of this growth, within this larger growth. While diversification is an important element of portfolio building, a focused approach to promising themes can be a particularly great approach to creating long-term wealth. The Edelweiss Focus Equity fund will give investors an opportunity to take concentrated exposure to robust long-term stories. One of the themes that is expected to play out well, in the next five to ten years, is a focus on market share gainers. Market share gainers stand to offer investors various benefits and make an excellent addition to the portfolio.

Leveraging market share gainers

Intuitively, one would assume that companies that are able to enhance their market share, especially in cost effective and efficient manner, can generate exponential value for shareholders. However, even within the broader spectrum of market share gainers, there are certain companies that are potentially better positioned to both capture as well as generate value. These can be identified by the following:

  • Increasing market share: These are companies that either already have significant market share or are slowly and steadily gaining prominence.
  • Higher growth than the sector: There are certain companies that are able to register sharper growth compared to both peers as well as the sector as a whole. These are generally sector leaders and offer the potential for stable returns.
  • Better operating leverage: Operating leverage acts as a strategic moat and enables certain companies to maintain margins across economic cycles.
  • Promising return ratios and margins: These are generally well-established companies that have strong financials and have weathered multiple economic cycles to cement their position in the market.
  • Higher shareholder value: These are companies that are able to consistently deliver high shareholder value in terms of better and consistent returns to investors.

These companies can be further bifurcated into consistent market share gainers and emerging market share gainers. The former are simply companies that have a deep moat and a meaningful position in the market. As a result, they are able to maintain a higher revenue growth rate compared to peers and have better margins and return ratios. The latter are upcoming businesses that are in the process of gaining or recapturing market prominence. They aim to gain market share through change agents such as leadership change, product innovation, strategic investments, etc. The change agent can also be higher revenue growth rate and better margins and return ratios than peers.

Importance of investing in market share gainers

Historically, market share gainers have proved themselves to be long term compounders with examples like Asian Paints registering a market share gain of greater than 100 basis points among the top 5 players in the sector. The company’s market cap growth has been 30% in the last five years, indicating the importance of market share gainers in a winning portfolio. Market share gainers have also outperformed the market significantly, with the top 20 market-share gainers across various sectors having generated significant outperformance over the broader market.

Another important reason to opt for market share gainers revolves around the fact that these companies are sector and market capitalisation agnostic. This means that an investor’s wealth is not relegated to just one sector or market cap, ensuring higher potential for sustainable returns from positive trends across the market at large. Further, as agents of change, such companies have the potential to transform the entire sector by leading the charge and investment in such companies will likely see strong compounding over the medium and longer term durations. Market share gainers also depict fundamentally robust financials and business models, making them prominent among their peers as these entities have the best potential for out-performance.

Given these factors, market share gainers offer tremendous scope for diversification and indicate excellent potential for wealth accretion.

(Manish Vinod is the Founder & Director, RM Associates. Views expressed are the author’s own. Please consult your financial advisor before investing.)

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