Trent, DMart are stimulus plays; HUL, GPCL turnaround stories: UBS

UBS, in its latest report, highlighted that the consumer sector is primed for a recovery, with multiple favorable factors coming together. The brokerage expressed a preference for Avenue Supermarts Ltd (DMart) and Trent Ltd as income stimulus plays. It sees Hindustan Unilever (HUL) and Godrej Consumer Products Ltd (GCPL) as key turnaround opportunities. Additionally, UBS views Colgate-Palmolive and Britannia Industries as companies approaching an inflection point, with earnings growth expected to rebound by next year. The foreign broking firm also finds ITC’s valuations attractive following a correction driven by tax concerns.

On the other hand, UBS said Asian Paints and Dabur India are its least preferred consumer plays. Asian Paints is facing uncertainty due to a disruption cycle, while Dabur is dealing with portfolio challenges. The brokerage also noted that Jubilant FoodWorks has already priced in a rebound in same-store sales growth (SSSG).

"We believe the consumer sector offers defensive qualities in a market that may continue to be risk-averse but could also see benefits if risk appetite returns," UBS said.

Below are the updated target prices for consumer stocks:

The foreign brokerage pointed out that HUL and GCPL have been underperformers over the past five years, though their portfolio issues are now improving. It expressed confidence in Trent and DMart due to their resilient value retail models.

UBS forecasts a recovery in earnings for the consumer sector in FY26, with expected growth of 13% following a weak FY25. The potential income boost from lower taxes and the upcoming Eighth Pay Commission over the next three years could reignite demand across various categories and extend the earnings growth cycle, according to UBS.

Additionally, consumer stock valuations have corrected significantly, with some falling as much as 35% since October.

"We view consumer stock returns based on three key factors: 1) growth narratives (growth strategies, disruptions, business models); 2) earnings dynamics (strength of the earnings growth outlook, and whether an inflection point is near); and 3) valuations (whether they align with near-term trends and long-term growth expectations). We favor stocks with strong growth potential, improving narratives, and clear earnings inflections," UBS stated.

The brokerage noted the interplay of various narratives within the sector: 1) turnaround stories in stocks with corrected valuations due to portfolio issues (HUL, GCPL, Dabur); 2) stocks underperforming due to disruption concerns (Asian Paints, DMART, Titan, Trent); 3) underperformers at an inflection point (Britannia, Colgate, Marico, ITC); and 4) contrarian plays like Jubilant FoodWorks.