The situation of less diversified FMCG firms is more critical

At a time when most sectors like banking, auto, and hospitality are struggling to maintain investor confidence, FMCG stocks are seeing a good boom. After falling 23 percent from January to March 23 (before the lockdown began), the Nifty FMCG index has climbed to 24 percent. In simple words, it can be said that it is about 7 percent away from its January high, but the Nifty 50 has come down by 18 percent during this period. Although the stable nature of the business has kept the pace of FMCG shares, investors should keep in mind the potential weakness of companies (especially non-food) that rely heavily on one or two categories for revenue and profits.

While the food segment is expected to perform well, companies like Colgate, Gillette India, Marico, and Bajaj Consumer Care may feel under pressure as they generate 60-90 percent revenue from their core categories of home and personal care. Analysts believe their performance may be affected by challenges in these key categories. The non-food segment has been hit more by pressure related to Kovid-19, which was under pressure before the epidemic.

Marico and ITC have also focused on other segments including food, but their contribution remains very low. More than 80 percent of ITC's operating profits come from its cigarette business, which is facing regulatory threats. This is also a major reason why ITC shares are available at historically lower valuations.

Deepak Jasani, head of retail research at HDFC Securities, says, "For companies that are more reliant on a category, the risk of market share decline is higher, competition is tighter or the pressure on the category is risky and May affect overall performance and evaluation. ' Another reason for caution is that some of these companies are still trading at 14-17 percent higher than their five-year valuation. While some of these FMCG companies (which have been stalwarts in their respective categories) have reported an increase in their latest quarterly results in market share, analysts are expecting their dominance to decline.

G Chokalingam, founder of Economics Research and Advisory, says the risk of losing market share is high for single-category companies with a large base and who are leaders in their respective categories. Colgate is a good example of how competition has affected its market share. The toothpaste manufacturer has lost 400 basis points of market share in three years till June 2019. The company has since stopped providing information about market participation. Analysts believe that big companies like Dabur and Hindustan Unilever are putting more emphasis on categories like toothpaste and hair oil.

In Gillette's case, the main concern arises from the change in consumer choice. Consumers are now preferring electric trimmers rather than shaving razors (and therefore creams, gels, etc.). On the other hand, although ITC is a well-diversified company, VST Industries and Godfrey Phillips are impacting sales of its main cigarette business.

There is no response to the email message sent to these companies.

Limited direct delivery is another factor affecting some companies. Naveen Kulkarni, chief investment officer at Axis Securities, says, "Some of these companies have greater engagement with the wholesale distribution channel, which has affected product availability given the availability of other options." They say that access to direct retail distribution is necessary for this reason. Companies such as Colgate, Marico, and ITC have more direct access and are therefore better positioned than others.

Analysts say that apart from the competition, the decline in business coupled with declining demand in certain categories has also made the road difficult for some less diversified companies. According to IDBI Capital analyst Varun Singh, "Hair oil categories have been under pressure for more than two years." They also believe that companies with high reliance on non-food categories may have problems maintaining a strong stock valuation. However, companies are focusing on various measures such as introducing new products in new segments and increasing direct access to their core categories to improve their performance and market share. Many of these companies have strong brand equity which will help them to grow both new and old businesses. However, some analysts believe that companies may have to compromise margins to increase sales.