India’s consumer sector, which faced a period of subdued performance in FY25, is poised for a strong comeback in FY26, according to a detailed analysis by global financial services giant UBS. The report pegs median earnings growth at 13% in FY26, a sharp recovery from the estimated 1% growth in FY25, indicating a fresh wave of optimism sweeping through this crucial segment of the Indian economy.

Muted FY25 Sets the Stage for a Strong FY26

In FY25, India’s consumer sector witnessed stagnant earnings growth, with the median rise estimated at just 1%, owing to macroeconomic headwinds, weak demand, and rising input costs. UBS views this slowdown as transitory, marking it as a base effect that will support robust year-on-year comparison in FY26.

UBS analysts believe that the earnings drag was also a reflection of weakened rural demand, elevated inflation, and market risk aversion, which contributed to a temporary dip in consumer activity.

Catalysts Driving the Expected Recovery in FY26

The expected 13% earnings growth in FY26 is set to be powered by multiple catalysts:

• Income stimulus measures: Possible rollout of the Eighth Pay Commission could significantly boost disposable income, especially for government employees.

• Potential tax relief: Lower income tax rates or rebates could stimulate spending and push demand across consumption categories.

• Favourable base effects: The weak FY25 numbers provide a low base for comparison, naturally enhancing the apparent growth in FY26.

• Stock valuation corrections: Since October 2024, consumer sector valuations have corrected by about 35%, making them far more attractive for institutional and retail investors.

This setup offers an ideal launchpad for a cyclical recovery, making consumer-focused companies appealing in terms of both valuation and growth potential.

UBS Identifies Structural and Policy Tailwinds

UBS highlights a number of structural tailwinds that support long-term growth in the sector. These include:

• India’s growing middle class

• Urbanisation and lifestyle upgrades

• Rising penetration of e-commerce

• Expanding retail infrastructure

In addition, government policy measures aimed at improving rural livelihoods, supporting MSMEs, and ensuring stable commodity prices are seen as key enablers of sustained consumption growth.

Sector Performance and Market Perception

Historically, the consumer sector has been viewed as a defensive play, offering stable returns in both bullish and bearish markets. The recent underperformance of consumer stocks, as UBS notes, is an anomaly that now positions them for a potential upside.

According to the report, many listed consumer companies have witnessed earnings downgrades and derating in the last 12 months. However, this has created attractive entry points for investors seeking stable returns, particularly ahead of a possible policy-induced consumption boom.

Input Costs and Margin Stability

A key concern for FMCG and other consumer companies over the past few quarters has been volatile input costs, especially in categories like edible oils, packaging materials, and logistics. The UBS report, however, indicates that the input cost cycle is now stabilising, which will help firms protect or even expand margins as demand picks up.

Stable raw material pricing allows firms to avoid frequent price revisions, which can often discourage consumption. With better predictability in margins, companies will have room to increase ad spends and product innovation, further enhancing demand.

Earnings Outlook: CAGR of 12.8% from FY25 to FY27

Looking beyond FY26, UBS projects a compound annual growth rate (CAGR) of 12.8% for the consumer sector from FY25 to FY27. This sustained growth will be fuelled by:

• A consumption-led recovery cycle

• Stable-to-improving macroeconomic conditions

• Enhanced investor confidence

• Increased capital deployment by firms in marketing, distribution, and digital transformation

This CAGR projection suggests that consumer companies will not only rebound but will continue to outperform many other sectors on a medium-term horizon.

Investor Strategy: Re-rating Likely Across Sub-segments

UBS’s outlook also includes investment strategy implications. The brokerage expects a sector-wide re-rating, especially in sub-segments like:

• FMCG

• Discretionary goods

• Apparel and lifestyle

• Consumer durables

• Retail chains

Investors are advised to accumulate fundamentally strong companies during dips and focus on those with low debt, high brand loyalty, and strong rural penetration.

Challenges That Remain

While the outlook is optimistic, UBS also acknowledges that some risks remain:

• Delay in implementation of income support schemes

• Weak monsoons potentially hurting rural demand

• Global geopolitical tensions affecting input prices

• Continued cautiousness among urban consumers in discretionary categories

However, these risks are outweighed by the visible catalysts, and the overall sentiment remains skewed towards a positive recovery trajectory.

Conclusion: A Consumption-Led Rebound on the Horizon

In summary, the UBS report offers a bullish outlook for India’s consumer sector heading into FY26. With a blend of policy stimulus, base effect advantages, and valuation corrections, the stage is set for a 13% median earnings growth, followed by a sustained CAGR of 12.8% up to FY27.

This makes the consumer sector one of the most attractive segments for investors, both domestic and global, seeking low-risk and high-growth opportunities in India’s evolving economic landscape.

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