ITC, Britannia, HUL, Titan: Top FMCG stocks to buy/hold even as BNP Paribas ‘Underweight’ on sector

BNP Paribas remains Underweight on the Indian FMCG sector given its rich valuation and high consensus earnings forecasts. For most companies, its earnings estimates are below consensus, and the brokerage have further lowered them post 3QFY23 results.

“While the FY24/25 outlook is positive with moderation in raw material costs and signs of rural recovery, we think risks remain on the extent of margin expansion due to sharp currency depreciation, an increase in advertisement spends, and cost benefits being passed on to consumers to drive volume recovery. Our preferred picks remain ITC, Titan, Britannia and Emami,” said the brokerage.

BNP Paribas’ top FMCG stocks buy/hold calls –

Emami: Buy, target price ₹510

Britannia: Buy, target price ₹5,210

Titan Co: Buy, target price ₹2,800

ITC Ltd: Buy, target price ₹425

Marico Ltd: Hold, target price ₹535

Dabur India: Hold, target price ₹570

Hindustan Unilever Ltd (HUL): Hold, target price ₹2,610

Nestle India: Hold, target price ₹19,100

Jubilant Foodworks: Hold, target price ₹445

Godrej Consumer Products (GCPL): Hold, target price ₹880

“3QFY23 witnessed some moderation in discretionary demand, especially post festive season, seen across QSR, retail, and apparel categories. While affluent India’s consumption trend slowed down during 3QFY23, mass market category continued to see pressure on rural slowdown and consumers down trading, though this improved q-q. FMCG companies continued to see gross margin pressure on a y-y basis, while ad spends remained low, shielding the EBITDA margin. Companies expect rural outlook to improve going forward with lower inflation, strong Rabi crop sowing and a pick-up in farm incomes,” the note stated.

Downside risks to our positive view on its BUY-rated stocks, as per BNP Paribas are an increase in competitive intensity, leading to companies cutting prices and sales growing at a lower-than expected rate, and a lower-than-expected margin recovery.

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