The consolidation theme has hit the pause button
Premium- Market share shift from unorganized sector seems to have hit a hurdle due to inflation
- Products such as footwear, tea and salt are seeing some down trading, said analysts
One man’s meat is another man’s poison. This could well summarize the glaring after-effects of the covid-19 pandemic for large and small firms. In a post-pandemic world, big companies got bigger, even as the smaller ones suffered because of stretched working capital. This led to big companies gaining market share at the others’ expense.
However, now the market share shift from the unorganized sector seems to have hit a hurdle, as a result of inflation. Customers are tightening purse strings and opting for unbranded yet cheaper products. “This (consolidation in market share) is a structural theme and we believe will continue. However, in the near-term, because of inflationary pressure, consumers could be down trading and going back to local or unorganized players," said Amish Shah, head of India research, BofA Securities.
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Kunal Vora, head of India equity research at BNP Paribas, concurred. “In the current environment of high inflation, our channel checks point to down trading in some categories in staples, where the customer is opting for cheaper brands, so some reversal (of market share) is happening," he said. With the price of items such as branded instant noodles and edible oil rising, it will not be surprising if consumers choose more pocket-friendly products.
The footwear category is another example. “Our channel checks show that because of inflation down trading is happening in the footwear segment. Relaxo Footwears can be expected to lose some market share to local footwear brands given its higher focus on the value-for-money segments versus peers," said Akhil Parekh, analyst, Centrum Broking Ltd.
Tata Consumer Products’ tea dealers in Maharashtra have noticed a decline in consumption as consumers have moved back to unorganized products (tea shop) showed a recent channel check report by ICICI Securities Ltd. “As out-of-home consumption has resumed, the unorganized sector is able to achieve the critical mass to sustain now," it said. Further, dealers expect more impact on volumes of salt as the gap between prices of Tata Salt and unorganized products has increased, the report said.
When the goods and services tax was introduced in India in 2017, consolidation was one of the key objectives. Post-covid, the pace of consolidation accelerated, especially in sectors such as consumer durables, ceramic tiles, paints, pipes, and wood, and ply manufacturing. The stock market showered its blessings, too.
“Most companies, especially in the fast-moving consumer goods (FMCG), paints, and home decor sectors are already trading at expensive valuations. These multiples have been assigned to them on expectations of beating industry growth," Vora said. As such, sustainable earnings growth is key to justify valuations.
Shares of Asian Paints, Berger Paints, Hindustan Unilever, and Pidilite Industries are now trading at 66x, 61x, 49x and 72x, respectively, estimated earnings for FY23, based on Bloomberg data.
The consolidation theme is yet to fully play out. As the chart shows, even after two years of covid, in some industries there is still a lot of scope for expansion in market share. Shah hopes the current reversal of market share gains is temporary.
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That said, there is a glimmer of hope for smaller firms, even as large manufacturers are expanding distribution and introducing products at lower price points to compete. “Pricing is not the only factor on which some smaller brands compete. In some cases, these local players enjoy more popularity and trust of customers," Vora said.
Against this backdrop, management commentary during this Q4 results season assumes greater significance.