During classroom sessions on equity research at the management institutes where I lecture, I never tire of telling my students that equity research involves more than simple number-crunching.

Our research team was early on the draw to signal the decline of HLL as a market-force at the bourses when it was still maintaining steady numbers.

Well, there is no rocket-science involved here. My boys and girls just walked into super-market stores randomly and scrutinised the manufacture dates of FMCG products which suggested that the shelf-life of HLL's products was on the upswing.

Not too long before this, HLL's products on the shelf had manufacture dates that went back barely a few days.

This is just to cite one instance of how we were able to foresee the impending decline of HLL as a market-force. There were several other such parameters which were subsequently validated by the company's declining numbers.

Memories tend to be short at the bourses. During most of the last decade, the FMCG industry was at the forefront, both on the economic front as well as at the bourses.

However, since the turn of the decade, the FMCG sector has been at the wrong end of the growth curve. Of course, the advent of a good monsoon this year has brought some belated cheer. But it is too early for captains of the industry to uncork the bubbly.

Food companies in the FMCG segment comprising players like Britannia, Cadbury, Glaxo SmithKline Consumer, Nestle and Tata Tea recorded a bottomline growth of only 6 per cent in the first half of the last financial year while the topline growth was a minuscule 0.5 per cent.

Marginally better off were consumer companies from the segment like Dabur, Colgate, P&G, Gillette and Marico, though they, too, recorded a dip in their topline during the period. Nevertheless, they recorded bottomline growth.

It must be noted though that companies in the sector are heavily dependent on rural markets, and the poor monsoons in 2002 only aggravated the situation.

However, these companies did see a recovery by the end of December 2002. Though there was a dip of 6 per cent in the topline, the bottomline recorded an increase of 13 per cent due to increased operational efficiencies.

While operational efficiencies through cost-cutting and the like are commendable, they are unsustainable on an incremental basis.

Amidst the cheer of a good monsoon in 2003, an area of concern for the FMCG segment is that prices of some raw materials, which were at all-time lows, have started spiralling.

Going forward, it may not be easy for companies to enhance operating margins. With topline growth still nowhere in sight, this could aggravate matters.

The prime reason for the poor performance of FMCG companies in recent times has been the relative reduction in consumers' disposable income.

It is worth noting here that, over the past few years, the demand for consumer goods has been shrinking while loans for houses, cars and durables have been on the upswing.

Hence, a fair portion of the already trimmed income of the consumer goes towards the repayment of these loans, leaving a minuscule pie for the monthly grocery extravaganza.

Consumer spending shifts from products at the higher end of the price spectrum to those at the lower end. It comes as no surprise that the fastest growing brands in 2003 have been mass market brands at the lower end of the price spectrum. Reading between the lines, the consequent effect is thinning of margins.

Adding to the segment's list of woes is the advent of fresh competition in the form of imported soaps, shampoos and cosmetic products.

With the removal of restrictions on import of consumer products, imported products have made their way to retail shelves. Here, too, we are talking of lower-end exporters like the Chinese and Malaysians.

This further buttresses the earlier point about price-sensitivity. Further aggravating the scenario is the unorganised sector, which puts out 'look-and-sound-alike' products in the rural and semi-urban Indian markets, where consumer awareness is lower.

It is estimated that the unorganised segment accounts for 7-10 per cent of the market.

The slowdown in consumer spending has resulted in intense competition. The big boys from the segment like HLL, Nestle Nirma and P&G are feeling the heat with regional and local players slicing away their market share through innovative and localised marketing strategies.

It is ironic that Nirma, whose success story had similar origins, finds itself on the wrong side of the cleft.

These players have been forced to enhance their advertisement-spend to protect their market share. Freebies have become the order of the day and promotions are either in the form of cash discounts or trade discounts (free products).

The adverse impact of these self-sustaining activities on the bottomlines of these companies are more than evident to those who patiently sift numbers.

Another point worth noting is that the penetration levels for most household and personal-care products have already scaled very high levels.

Furthermore, having realised that it is now a buyers' market, consumers are trying to stretch their rupee to the maximum. Resultantly, 'value for money' products tend to grow at the cost of premium ones.

Having commenced this discussion with a story from the past, about how our research team had identified HLL as a potential under-performer, it is only fair to stick my neck out and crystal gaze into the future.

My team and I opine that another high-flying company from this segment whose best days are already behind it is ITC.

With the spate of huge compensation rulings against tobacco companies by courts in the West, the countdown has begun for an encore in other parts of the world. India is no exception.

Having already foreseen what lies ahead, the ITC group has sought to diversify its activities.

However, no amount of diversification and surrogate advertising will change the fact that its bread winner is tobacco and that there is a growing apathy worldwide for products preying on the health of human beings.

The fact that a brilliant advertisement (which was a spoof on the Marlboro advertising style) for the Cancer Society by an Indian advertising firm won an international award and wide acclaim reflects this growing awareness worldwide. A staggering compensation claim would put ITC in an extremely tight position.

But it is premature to prepare an epitaph for an industry that once rode high at our bourses.

To cite a few positives, most companies from the FMCG segment can boast of strong and proven managements, time-tested and popular brands and historically strong financials and free cash flows.

Hence, notwithstanding the dark clouds that loom large over the segment, there is no dearth of FMCG stocks that still merit a look as defensive bets.