Stocks to buy: DMart, Trent to Colgate — UBS recommends THESE FMCG stocks amid potential earnings rebound in FY26
Published on 22/04/2025 01:20 PM
Stocks to buy: Global brokerage firm UBS, in its latest note, has upgraded ratings on select group of stocks in the consumer sector—including Colgate, Trent, HUL and ITC— and retained its bullish view on other stocks such as Avenue Supermarts and GCPL as it believes the sector is poised for a strong rebound in the current fiscal year.
The FMCG sector's share price weakness has been exacerbated by cyclical headwinds to demand and margins in recent years, but UBS expects these to recede in FY26E. As per the brokerage, the recovery is expected to be driven by earnings growth, attractive valuations, and the resolution of structural challenges.
UBS sees the input price cycle and base effects broadly turning favorable in FY26. Income stimulus measures—such as lower taxes and the Eighth Pay Commission—are likely to help drive a phase of stronger earnings beyond FY26.
The brokerage underscored that income stimulus from the 8th Pay Commission could boost consumption and extend the earnings growth phase, especially in some key categories.
UBS India economist Tanvee Gupta Jain recently cut her FY26 real GDP growth forecast from 6.3% to 6% YoY. However, the brokerage believes the overall impact of a slightly slower economy on consumer demand will be minimal.
FY25 was a cyclically weak year, but UBS expects earnings growth to turn around in FY26 and continue recovering in FY27 as the base normalizes and demand gradually picks up. Compared with 1% median earnings growth in FY25, UBS forecasts 13% growth in FY26 and an earnings CAGR of 12.8% between FY25 and FY27.
According to the brokerage, weak demand and input cost pressures weighing on margins have already been priced in, given the sharp correction in the sector since the October 2024 peak. Valuations are now back in a reasonable range, with any earnings rebound potentially serving as a key catalyst.
As per the brokerage, recent discussions with industry experts indicate rural consumer sentiment is strong and the demand outlook is promising. It believes urban mass market demand is recovering, with inflation falling from around 7% in FY23 to 3% as of March 2025, while premium segments continue to perform well in urban markets.
UBS’s Stock Picks: Value retailers, turnaround bets, and inflection point playsUBS's preferred approach is to buy laggards at inflection points, companies with successful high-growth business models that are not vulnerable to disruption, and those that can benefit from cyclical earnings rebound.
It prefers DMart and Trent as income stimulus plays, given their resilient value retail models. As turnaround stories, it favours HUL and GCPL, five-year laggards with portfolio issues now on the mend. UBS views Colgate and Britannia as being at an inflection point, with earnings growth revival likely by next year.
The brokerage also sees appealing value in ITC following a correction triggered by tax-related concerns. On the other hand, Asian Paints is the least preferred, given uncertainties arising from a disruption cycle, while Dabur faces continued portfolio challenges. UBS notes that Jubilant FoodWorks has already priced in a same-store sales growth (SSSG) rebound.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
The promoters of HT Media Ltd, which publishes Mint, and Jubilant Foodworks are closely related. There are, however, no promoter cross-holdings.
The FMCG sector's share price weakness has been exacerbated by cyclical headwinds to demand and margins in recent years, but UBS expects these to recede in FY26E. As per the brokerage, the recovery is expected to be driven by earnings growth, attractive valuations, and the resolution of structural challenges.
UBS sees the input price cycle and base effects broadly turning favorable in FY26. Income stimulus measures—such as lower taxes and the Eighth Pay Commission—are likely to help drive a phase of stronger earnings beyond FY26.
The brokerage underscored that income stimulus from the 8th Pay Commission could boost consumption and extend the earnings growth phase, especially in some key categories.
UBS India economist Tanvee Gupta Jain recently cut her FY26 real GDP growth forecast from 6.3% to 6% YoY. However, the brokerage believes the overall impact of a slightly slower economy on consumer demand will be minimal.
FY25 was a cyclically weak year, but UBS expects earnings growth to turn around in FY26 and continue recovering in FY27 as the base normalizes and demand gradually picks up. Compared with 1% median earnings growth in FY25, UBS forecasts 13% growth in FY26 and an earnings CAGR of 12.8% between FY25 and FY27.
According to the brokerage, weak demand and input cost pressures weighing on margins have already been priced in, given the sharp correction in the sector since the October 2024 peak. Valuations are now back in a reasonable range, with any earnings rebound potentially serving as a key catalyst.
As per the brokerage, recent discussions with industry experts indicate rural consumer sentiment is strong and the demand outlook is promising. It believes urban mass market demand is recovering, with inflation falling from around 7% in FY23 to 3% as of March 2025, while premium segments continue to perform well in urban markets.
UBS’s Stock Picks: Value retailers, turnaround bets, and inflection point playsUBS's preferred approach is to buy laggards at inflection points, companies with successful high-growth business models that are not vulnerable to disruption, and those that can benefit from cyclical earnings rebound.
It prefers DMart and Trent as income stimulus plays, given their resilient value retail models. As turnaround stories, it favours HUL and GCPL, five-year laggards with portfolio issues now on the mend. UBS views Colgate and Britannia as being at an inflection point, with earnings growth revival likely by next year.
The brokerage also sees appealing value in ITC following a correction triggered by tax-related concerns. On the other hand, Asian Paints is the least preferred, given uncertainties arising from a disruption cycle, while Dabur faces continued portfolio challenges. UBS notes that Jubilant FoodWorks has already priced in a same-store sales growth (SSSG) rebound.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
The promoters of HT Media Ltd, which publishes Mint, and Jubilant Foodworks are closely related. There are, however, no promoter cross-holdings.