Importance of Market Share in
India
THEME
Market leaders – slowdown proof?
■ We analysed the stickiness of market share for companies across a
large number of industries in India during growth periods and
slowdowns. Market leaders in consumer staples (HUL), cigarettes (ITC)
and two wheelers (Hero Honda) benefit most during slowdowns.
■ While analysts often forecast profitability and capital returns based on
market share, the reality is that market share drives profitability only in
a few industries such as banks, TV channels, consumer staples,
telecom and cars. In other industries such as airlines, spirits and tea, it
has little impact, if any, on profitability or stock price performance.
■ Market share is most sticky in cigarettes and consumer staples and
least sticky in TV channels, where switching costs (literally!) for
consumers are virtually absent and leadership can often change in a
month. While market share dominance can be an effective entry barrier
for newer entrants, there are associated costs. As industries mature,
stickiness of market share for leaders increases. Finally, it is the extent
of dominance by the market leader that drives RoCE.
■ Market leaders across industries benefit most during slowdowns as
competitive intensity reduces. Consumers exhibit a ‘flight to quality’ to
established leaders. We prefer market leaders in consumer staples
(HUL), cigarettes (ITC) and two wheelers (Hero Honda). Stickiness as
well as dominance of market share is highest in consumer staples and
cigarettes. Two wheelers is one of very few industries where the
market leader has increased share without sacrificing pricing power.

Market leaders – slowdown proof?
Market share numbers are important for consumer stocks and are avidly tracked across
segments. Analysts often extrapolate the past into the future by forecasting either
uniformly rising or stable market share. We analysed stickiness of market share for
companies across a large number of industries in India, its impact on competition,
profitability and capital returns and finally its implications on stock price returns across time.
High market share not always = high profitability
We analysed representative companies across industries to see if market share numbers
are actually a meaningful driver of profitability or capital returns and more importantly of
stock prices. We found that market share is a more relevant and direct driver of profitability
in some industries (banks, TV channels), while it has an indirect impact in: 1) mature
industries with high penetration and relatively slower growth rates (soaps and detergents,
cigarettes) and 2) industries with high fixed costs (cars, telecom), where capital returns
and consequently stock price returns are far more dependent on companies maintaining or
growing past market share into the future. Again, the nature of some industries lends itself
to opportunities where companies can develop two sided network externalities and
maintain higher market shares for long periods of time.
Market share forecastable only in select industries
We analysed stickiness of market share for market leaders across various industries. In
more mature industries, such as cigarettes, toothpaste and soaps, market share tends to be
stickier while for TV channels, where switching costs (literally!) for consumers are virtually
absent, market leadership can often change in a period as short as one month. We also
found that as industries mature, the stickiness of market share for leaders increases, as
evidenced in the telecom industry. The nature of some industries like consumer staples,
airlines and telecom, makes it tougher for newer entrants to garner a meaningful market
share, given advantages enjoyed by market leaders in terms of brands or scale
(manufacturing, distribution, financial); however there are costs associated with stickiness of
market share. Finally, while stickiness of a dominant market share has its advantages, the
extent of positive impact on RoCE is far more pronounced when the magnitude of leadership
is large and when competitive intensity is low.
During a slowdown, buy the leaders
Market leaders across industries benefit most during slowdowns, in our view. Historically,
the competitive intensity within an industry reduces during slowdowns. Consumers too,
exhibit a ‘flight to quality’ where they often stick to products or services offered by market
leaders. It is during such times that market leaders across industries increase market
share by leveraging their traditional strengths. When industry growth returns, leaders are
usually able to maintain these gains. Our results show that market leaders in consumer
staples (Hindustan Unilever Ltd (HLL.BO, Rs245.80, OUTPERFORM, TP Rs241.11),
cigarettes (ITC Ltd (ITC.BO, Rs172.50, OUTPERFORM, TP Rs212.99) and two wheelers
(Hero Honda Motors Ltd (HROH.BO, Rs743.25, OUTPERFORM, TP Rs981.71) benefit
the most during slowdowns. Consumer staples and cigarettes rank the highest in our
stickiness of market share index as market leadership in these segments is least volatile.
Additionally, the extent of dominance for both Hindustan Unilever and ITC is higher
compared to most market leaders in other industries. Consequently, the impact of market
share on RoCE is accentuated. We also rate Hero Honda high in our preferences because
it is one of few market leaders that has increased market share during slowdowns without
sacrificing pricing power. We note that HUL, ITC and Hero Honda generate positive free
cash flow and have net cash surplus – a significant positive in the current environment.