Consumer Sector Check - Recap, Review, Restore: Motilal Oswal

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Motilal Oswal Report

After the election outcome, the rally in consumer stocks has extended further for the last two days, which is mainly attributed to portfolio allocation. We believe this rally in staple stocks is driven by not only its ‘defensive sector’ tag but also the underlying excitement, which was triggered by strong post-Q4 management commentary.

Most investors were in sync with us on the risk-reward proposition (noted during our extensive road show on consumer thematic); however, they wanted to see more signs of recovery before buying into the sector. In the last two days, the risk-reward proposition along with sector tailwinds, has quickly gained the required attention.

How do we want to play?

In our initial argument of favorable risk-reward for staple companies, certainly the reward has come quite quickly. But the question arises: has the risk increased due to this stock rally? We believe that as earnings catalysts are in place and stocks are also within our fundamental value, the risk factor is still under control.

However, volume performance will be critical to maintaining the stocks’ performance. The sector has seen several headwinds in FY23/FY24, we believe the earnings cycle will see an upward trend. An abovenormal monsoon, rural pickup, distribution expansion, seasonal benefits (summer/winter portfolio has favorable base) and steady raw material prices provide visibility on the earnings acceleration in FY25.

Top picks: We maintain our over-weight call on the staple sector and continue to prefer HUL, Godrej Consumer Products and Dabur as our top picks.

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Motilal Oswal FMCG Sector Check.pdf

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