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India – Consumer FY20E Outlook: Chinks in the Armour

— Varun Lohchab, Jefferies Asia Equity Research – India Consumer

Contrary to expectations, consumer staples outperformed again in FY19 (and in eight of the last 10 years), although with higher earnings and valuation divergence with several stocks de-rating. While the overall sector de-rating hinges on broader market earnings recovery, odds are against the sector in FY20E with rising competition, peak margins, low margin of safety and low tolerance for earnings downgrades. Jefferies remains cautious and selective with a preference for companies with superior top-line driven earnings growth where margins are not looking too stretched from a medium-term perspective given benign raw material pricing and competitive intensity in the past few years. Jefferies maintains a Buy on APNT, NEST and DABUR given improving execution and growth traction, while ITC is a Buy on favorable risk-reward with a less harsh regulatory environment. FULL REPORT