The consumer market in India is capturing significant attention, as UBS, a prominent international brokerage, anticipates a promising shift in this sector. Dubbed the potential “Goldilocks phase,” UBS suggests that favorable conditions are aligning for a robust recovery in consumer earnings and valuations. With expected improvements on the horizon, investors are keenly observing this evolving landscape.
Positive Earnings Outlook
UBS projects a 13% increase in earnings for the consumer sector by FY26, following a quieter performance in FY25. This optimistic forecast is bolstered by anticipated tax reductions, potential salary hikes from the Eighth Pay Commission, and a decline in inflation rates. These factors collectively enhance the attractiveness of the sector for investors.
- Key Factors Influencing Growth:
- Expected tax cuts
- Salary increases
- Easing inflation trends
“The sector is at a turning point,” UBS emphasizes, highlighting that valuations have significantly dropped—by as much as 35% since October, making it a safe yet opportunistic investment in a market characterized by low risk tolerance.
Four Themes in Consumer Stocks
UBS categorizes the consumer sector into four distinct themes, each presenting unique investment opportunities:
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Growth Turnarounds: Companies that faced challenges but are now showing signs of recovery. Key players include HUL, Godrej Consumer, and Dabur.
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Disruption-Driven Derating: Strong businesses undervalued due to perceived risks. This category features Asian Paints, DMart, Trent, and Titan.
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Undervalued Laggards: Premium stocks at significant turning points, including Colgate, ITC, Britannia, and Marico.
- Contrarian Cycles: Firms with long-term potential despite current struggles, such as Jubilant FoodWorks.
Top Recommendations from UBS
Avenue Supermarts (DMart)
UBS has issued a Buy recommendation for Avenue Supermarts (DMart), setting a target price of ₹5,200. The brokerage views DMart as one of the most effective and profitable retail models in India, particularly targeting lower and middle-income consumers.
Despite initial concerns regarding the rise of quick commerce, DMart is adapting by enhancing its online presence through DMart Ready. UBS anticipates a 20% revenue CAGR and 25% EPS growth from FY25 to FY27.
Trent
With a target price set at ₹6,200, UBS recommends Trent as a Buy. The rapid expansion of its Zudio value fashion format, particularly in tier-2 and tier-3 towns, positions it favorably for future growth.
UBS highlights that Zudio’s store count has increased by 50% CAGR over the past five years, with plans to open an additional 400 stores by FY27. The company’s execution and supply chain efficiency give it a competitive edge, with projected revenue and EPS growth of 29% and 36%, respectively.
Hindustan Unilever (HUL)
UBS also advocates for HUL as a Buy, targeting a price of ₹2,800. With a history of underperformance, HUL is expected to regain its footing starting FY26, driven by the new global CEO’s focus on revitalizing the brand and addressing gaps in the beauty and wellness sectors.
The brokerage notes HUL’s cost leadership and scale as significant advantages, forecasting a 6-7% volume growth in the latter half of FY26.
Godrej Consumer Products (GCPL)
Godrej Consumer Products (GCPL) receives a Buy rating from UBS with a target price of ₹1,500. The company is poised for a turnaround thanks to innovations in household insecticides and improved margins in international markets such as Indonesia.
UBS believes GCPL is entering a stronger phase, expecting earnings to grow at a 19% CAGR from FY25 to FY27.
Additional Recommendations
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Colgate-Palmolive: Rated as a Buy with a target price of ₹3,100, Colgate is pivoting towards premiumization and expanding its market penetration, showcasing a strategic reset in margins.
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ITC: Upgraded to Buy with a target of ₹490, ITC’s current stock valuation appears undervalued, particularly in light of its cigarette segment’s potential earnings.
- Britannia: UBS recommends Britannia at a price target of ₹6,350, viewing recent stock corrections as an opportunity to invest in a strong brand poised for recovery.
In a shifting landscape, UBS’s insights into the Indian consumer sector suggest that smart investments in these companies could yield promising returns as the market adjusts to new economic conditions.
