Hungry for urban consumption plays? Analysts favour HUL, Nestle over Dabur, Britannia, Emami; Asian Paints could still struggle

Hungry for urban consumption plays? Analysts favour HUL, Nestle over Dabur, Britannia and Emani. Asian Paints could still struggle

The Union Budget 2025 has placed consumption stocks in the spotlight, raising hopes of a demand revival, particularly in urban markets. The key driver? A significant income tax relief aimed at boosting middle-class spending power. But will this translate into a broad-based recovery for consumer stocks, or will gains be restricted to select players?

The Nifty FMCG index has struggled, down over 12 percent from its 52-week high as volume growth faltered across staples. The latest tax cut—making income up to Rs 12 lakh tax-free—could be a shot in the arm, but analysts remain divided on its actual impact on spending habits.

Staples vs. discretionary: the market is split

While discretionary spending may see an uptick, staples could see limited upside. Reports from ICICI Securities and Investec highlight that companies with higher urban exposure and a premium product mix stand to benefit the most. CLSA remains cautious, noting that the budget lacks a significant rural stimulus, potentially hurting companies with greater reliance on hinterland demand.

Adding to the uncertainty, DAM Capital warns that rising household debt may see consumers prioritizing loan repayments over discretionary purchases.

Premiumisation remains the big bet

Despite mixed views on staples, analysts broadly agree on one theme—premiumisation. Axis Securities’ Preeyam Tolia expects premium brands across FMCG to outperform, with companies like Hindustan Unilever (HUL), Nestle, and Britannia well-positioned to capitalise on shifting consumer preferences.

HUL, which derives 33-35 percent of its sales from premium products and has 60 percent urban exposure, is doubling down on categories like premium hair care, body wash, and wellness products. Nestle, with 80 percent of its portfolio catering to urban consumers, is poised to gain from increased spending on packaged foods, chocolates, and coffee. Britannia, too, is expected to see demand pick up in its bakery segment.

ICICI Securities prefers HUL and Nestle over mass-market players like Britannia, Dabur, and Emami, which are more dependent on rural consumers.

Paints may be a surprise winner, but which stock?

Paint stocks could emerge as a key beneficiary of rising disposable incomes, as consumers spend more on home upgrades. Asian Paints, which has seen growth pressures due to urban demand slowdown, stands to benefit. However, competition from Grasim’s aggressive entry into the segment and volatile raw material costs remain key risks to margin expansion. This means, the stock could see a downside risk.

Valuation: is a re-rating coming?

FMCG stocks, traditionally high PE names, have seen valuation corrections. Gautam Duggad of MOSL notes that staples have undergone multiple years of de-rating, making them attractive for a potential re-rating if earnings recover in the next few quarters. HUL’s PE multiple, which stood at 70x in 2020, is now closer to 48-50x.

Paint stocks have also seen sharp corrections, with Asian Paints down 30 percent from its peak, while Pidilite has slipped 13 percent, making valuations more reasonable.

Beyond staples: where else will the money flow?

A boost in discretionary spending could benefit quick-service restaurants (QSRs) like Jubilant FoodWorks and Sapphire Foods, as urban consumers shift towards experience-led spending. Axis Securities also expects positive momentum in the alco-beverage sector, with premium liquor brands set to gain from the shift in consumption patterns.

Bottomline: While the budget has created tailwinds for premium consumption, mass-market staples may still face headwinds, particularly in rural markets. For investors, the focus is now on stock selection—premium players and urban-focused discretionary names could be the biggest winners, while staples and rural-centric names may still struggle.