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Indian stocks logged record highs yet again on Tuesday, aided by an uptick in fast-moving consumer goods (FMCG) with Nifty FMCG rising the most among sectoral gauges as leading FMCG makers expect consumption to accelerate further.

“The Indian FMCG industry’s three-year sales CAGR improved to 12.5% in 2QFY23, led by price increases in several categories. During the earnings season, we raised our sales estimates for most companies with an aggregate increase of 0-1.5% for FY23-25. Management’s commentary on demand and margins remains positive, with the expectation of rural demand recovery and commodity cost moderation," said brokerage BNP Paribas.

The brokerage is Underweight on the Indian FMCG sector due to its rich valuation and elevated consensus earnings forecasts as the sector has seen a sharp increase in valuations over the last decade amid low interest rates. 

“While the outlook for FY24 is positive, driven by moderation in raw material costs and signs of a rural recovery, we think consensus earnings estimates for FY24/25 are too optimistic. With no triggers for a sharp multiple de-rating, we believe some stocks can see time correction over the next year. Our preferred sector stock picks remain ITC, Britannia, Emami and Jubilant Foodworks," it said.

The brokerage has Buy tags on Emami shares with a target price of 580, Jubilant Foodworks (TP: 690), ITC Ltd (TP: 400), and Britannia (TP: 4,550). 

Meanwhile, it has Hold ratings on Marico (TP: 535), Titan Co (TP: 2,870), Dabur India (TP: 560), Godrej Consumer Products (TP: 870), Hindustan Unilever (TP: 2,570), and Nestle India (TP: 17,700). 

“While affluent India’s consumption is holding up well, mass-market and Covid beneficiaries (healthcare and hygiene) saw volume pressure due to inflation. Revenue growth was driven by price hikes, with volumes remaining subdued across categories. The volume contraction was more pronounced in rural areas. Companies expect rural demand to recover in 2HFY23, on the back of government interventions, a good monsoon and higher crop realisations," it added.

Potential catalysts for the sector are, as per BNP Paribas, could be further moderation in commodity costs; and a recovery in volume growth.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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