Consumer Stocks at Fair Valuations, ITC in 3 Stock Picks: Nomura

After a sharp correction in consumer stocks, global brokerage firm Nomura believes these stocks are now at fair valuations as it named Marico, Hindustan Unilever (HUL) and ITC as its top picks in the sector.

Nomura paid Mariko Rs. 760, for HUL Rs. 3,100 and for ITC Rs. Has a ‘Buy’ rating on all three stocks with a target price of 575.

Preferring the bottom-up thesis, global brokerage firms expect these companies to expand into new categories/markets, with pricing power, and invest in digital capabilities.

Consumer stocks have rallied sharply in recent months due to lower-than-expected demand and continued declines in incomes. The sector is now trading at a 2-point dev above its five-year trading average.

“With India’s inflation likely to moderate and GDP to improve, we believe volume growth will improve marginally and price increases will improve value growth. We see risk-weighted sector valuations at a reasonable level and any easing from the administration on inflation and taxes/rebates to be supportive for the sector,” Nomura said in its report.

Nomura further said that urban demand is expected to remain weak in the first half of 2025 due to a lack of recovery catalysts. However, a cyclical improvement is expected in the second half of the year.

Overall, volume growth is expected to remain below the long-term average. Any measures taken by the administration to reduce inflation and boost disposable income, such as tax cuts or concessions, could potentially revive urban demand.

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Additionally, given the sharp inflation in raw material prices (palm oil, tea, coffee, cocoa etc.), companies have started raising prices, albeit at a lower rate than commodity inflation.

“We believe companies will continue to raise product prices gradually to avoid any volume shock. This should support overall sales value growth in 2025F versus 2024 where companies cut prices for most of the year,” Mihir P. said Shah, an analyst at Nomura.

The global brokerage firm also noted that sharp rise in raw material costs will reduce the competitive intensity of regional/unorganized players as they operate on thin margins and limited working capital, making them uncompetitive against organized players, who are better equipped. Maneuver and even recruit customers at such times.

While current margins for most consumer firms are still below their pre-COVID levels, Nomura expects margin expansion to remain limited in 2025F as firms may avoid flexing strong pricing power given the weak consumer demand environment.

Hence, most companies are expected to focus on volume growth and market share prioritizing margin expansion.

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(disclaimer: Recommendations, suggestions, opinions and views given by experts are their own. (These do not represent the views of The Economic Times)