Why ITC fears FMCG competition from Reliance?

ITC Ltd has normally been a fairly volatile stock, especially due to its cigarettes business. However, the latest round of pressure on the stock price of ITC is not due to cigarettes but due to the FMCG business. For instance, ITC hit a 2-month low of Rs. 331.90 and in the process it has fallen more than 8% since October this year. ITC has a very strong presence in the FMCG business, which includes staples, biscuits, noodles, snacks, chocolate, dairy products & personal care products. Its latest competition has not come from the existing FMCG companies but Reliance foraying into FMCG with its brand “Independence”.

During the current month, Reliance Consumer Products, the FMCG arm of Reliance Retail Ventures, announced the official launch of its FMCG brand “Independence” in the state of Gujarat. Its product portfolio across its proprietary portfolio will straddle almost the same products that ITC is into like; staples, processed foods, beverages and other daily essentials. The Reliance Independence brand will also sell edible oils, pulses, grains, packaged foods and other daily needs products. Most analysts are considering this to be a major threat for ITC as also for other FMCG players. However, the risk is likely to be more pronounced in the case of ITC as the product portfolio is largely similar to that of Reliance Independence.

The immediate risk for companies like ITC in the FMCG business is that the presence of the Reliance group in that line of business would most likely squeeze margins of these companies. That would also mean a substantial commoditization of the FMCG business as well as the contraction of premium valuation multiples; that most of the FMCG companies in India enjoy. More so, the risk is pronounced because, ITC’s FMCG business has been growing at a sustained pace with continuous improvement in margins in last 5 years. That pace of growth is likely to be nipped by the presence of Reliance and the margin pressures that it would force on ITC. After all, we all recollect what happened in telecom.