Over the past few quarters, consumer firms have been plagued with faltering demand, rising competitive actions and margin pressures, weighing on their stock prices. According to international brokerage Jefferies, while there has been a gradual improvement in some of these issues, several stocks have factored in the risk.
This leads to limited downside in shares of certain consumption players, but a meaningful upside in case of a turn. As a result, Jefferies highlighted Varun Beverages Ltd, Hindustan Unilever Ltd, and Asian Paints Ltd as its top contra-ideas for the next 12 months, calling them 'fallen angels.' The brokerage even upgraded its rating on Asian Paints shares from 'underperform' to 'buy'.
Following the report, shares of Varun Beverages rallied 2.3 percent to Rs 468.6. Shares of HUL were quoting Rs 2,422.5, up 1.3 percent, while Asian Paints stock price was trading at Rs 2,503.6, up 0.8 percent on the NSE at 11.30 a.m. The gains in these counters also lifted the Nifty FMCG index, that was trading 0.7 percent higher at 55,937.10.
Consumer-facing categories, have been grappling with subdued demand over the past few quarters. This weakness was first visible in rural areas but has seen stabilisation in the recent past, along with some improvement too. Urban demand, on the other hand stayed resilient post Covid but now has shown signs of moderation, noted Jefferies.
Further, another challenge for the FMCG pack has been the lack of adequate product price hike which also impacted the industry revenue growth. This was partially due to sharp input cost correction in certain key inputs along with mix deterioration due to slowing premium product sales and increase in value packs or low-priced SKUs in certain cases.
Additionally, the impact of inflation has varied across companies & categories and hence had varying impacts on gross margins. High volatility in key inputs also made decision-making difficult as some of the players adopted a wait and watch approach. As a result, margins actually witnessed pressure.
Given the margin pressure and lack of price hikes, stiff competition also weighed on the firms. Incumbents in some of the categories have also faced acute competitive pressures which has impacted across different levels including growth, market shares, ad investments, and profitability.
As a result, opportunities emerged. "Led by the above factors, many of the stocks have underperformed sharply, with some even down as much as 25-30 percent from the peak."
Jefferies identified three names which offer reasonable-to-attractive risk-reward, with limited downside, as below:
Varun Beverages: At the time when concerns were brewing on increased competition, a weak summer has further added to the woes. While this requires 9-10% EPS cuts, on June 2026 basis, the stock trades at 43x P/E and appears attractive.
Asian Paints: Grasim's Birla Opus exerted severe pressures at a time when industry growth rates also softened along with certain management changes coupled with high input cost volatility. "While Birla Opus will continue to ramp-up, we believe that the easy gains are already captured and expect a gradual recovery in earnings starting FY26 for Asian Paints," said the brokerage, upgrading the stock to 'buy' with a revised price target at Rs 2,830.
Hindustan Unilever: The stock has struggled on several fronts, most of which are highlighted above and this is reflected in the share price which has stayed flat for the last five years due to weak earnings trend. "The recent change in stance by management on prioritising growth over margins along with parent's high focus on India should set the stage for recovery, and we retain buy," Jefferies noted.
According to Jefferies, "none of the above names are cheap by any stretch of imagination", but the brokerage sees a potential for a cyclical upturn in the fundamentals, which should drive up share price. "And in case our thesis does not play out, we think downside from current levels is limited," it added.
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