FMCG stocks likely to see valuation re-rating, says Emkay Global; upgrades HUL, Nestle; cuts ITC share price target

FMCG stocks have demonstrated remarkable resilience amid heightened volatility in the Indian stock market after the Lok Sabha Election 2024 results. The Nifty FMCG Index rallied around 5% on Wednesday after gaining 1% in the previous session during the stock market crash. 

After the disappointing election results, when all the sectoral indices took a heavy beating, investors fled to defensive bets and picked some fast-moving consumer goods (FMCG) and auto stocks.

Analysts believe the shift in political climate adds another tailwind to the consumption story of India, where positives from the rural turnaround and better monsoon were already anticipated.

Also Read: When mkt crashes, defensives like HUL, Nestle, Hero stand tall

Market expectation prior to election results was on pro-infrastructure measures, which were perceived to benefit consumption, again with a lag. However, analysts now believe that the current seat tally of ruling Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) will keep the government on its toes with pro-consumption initiatives being key. 

Amid this, analysts see tailwinds for the FMCG sector, which will aid overall valuations.

“With inflation cooling down and expected to settle, the overall consumption is likely to see a revival. This aligns well with the turnaround in rural growth (growth gap to urban to see expansion) and expectations of above-normal monsoon for FY25,” said Nitin Gupta, Senior Research Analyst at Emkay Global Financial Services.

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He also sees structural benefits arising from central government schemes like the Ujjwala scheme, Jal Jeevan mission, Swachh Bharat Abhiyan, Housing for All initiatives, etc.

Meanwhile, in the quarter ended March 2024, the management of most FMCG companies had noted action plans regarding enhancing prospects with distribution expansion. The brokerage firm sees that macro support will aid growth ahead and holds on to its expectation of high-single digit growth for FY25, as it sees the benefits realize with a lag. 

Players having seasonal portfolio like Dabur India, Emami, and Godrej Consumer Products are likely to have better performance with seasonal support, Gupta said.

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He is of the view that FMCG sector valuation is likely to see a re-rating with the emergence of tailwinds that align well with the enhancement in company execution. From the near-term perspective, the full Union Budget could likely boost consumption prospects. 

In its coverage, Emkay Global sees Hindustan Unilever, Dabur, and Nestlé India’s FY26E P/E valuations trading at 7-13% discount to their respective 5-year average forward P/E. With better macro prospects, it upgraded the rating on Hindustan Unilever shares to ‘Buy’ and increased the HUL share price target for June 2025 to ₹2,900 from ₹2,575 earlier.

Also Read: Lok Sabha Election results 2024: What does lack of BJP majority mean for market, economy? Foreign brokerages weigh in

Dabur India remains the brokerage’s preferred pick on rural recovery and consumption revival themes. It prefers Bikaji Foods International and Honasa Consumer on relatively better execution. 

Emkay Global upgraded Nestlé India shares to ‘Add’ from ‘Reduce’, with unchanged target price of ₹2,600. However, it cut ratings on ITC shares to Add’ from ‘Buy’ and also slashed ITC share price to ₹460 apiece from ₹510 earlier, as it cuts the Cigarettes business target P/E valuation from 22x to 18x, given the business stress and tax hike expectations.

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.