BUY OR SELL-Indian defensives to ride out rain woes?

* ITC, Nestle top picks to beat rural spending squeeze

* Hindustan Unilever's rural dependence seen a drag

* Shares of ITC up more than 30 pct this year

* Nestle India shares could rise 10-15 pct (For more Reuters BUY OR SELL stories, click [BUYSELL/])

By Janaki Krishnan and Aniruddha Basu

MUMBAI, Aug 24 (Reuters) - Poor rainfall in India has prompted brokerages to pick monsoon-proof stocks over perennial defensive favourite Hindustan Unilever (HLL.BO), seen hurt by lower rural incomes and spending.

Brokerages favour retail stocks such as ITC Ltd (ITC.BO) and Nestle India (NEST.BO), which are less exposed to rural markets dependent on annual monsoon rains.

In the past year, the consumer goods share index .BSEFMCG has climbed 17 percent, while the benchmark index .BSESN gained just 4 percent. So far in 2009, the sub-index is up by more than a quarter, trailing a near 60 percent rise on the main market.

RAINY-DAY FAVOURITE

Diversified ITC, 31.7 percent-owned by British American Tobacco (BATS.L), derives about 60 percent of its revenues from its cigarette business, which is unaffected by a fall in rural spending as the weak monsoon cuts incomes.

ITC competes with Hindustan Unilever Ltd (HUL) (HLL.BO), the Indian unit of Unilever Plc (ULVR.L), in soaps, personal care products and food items.

"In terms of heavyweights, we prefer ITC to HUL, because ITC is less impacted by monsoon vagaries," said Angel Broking's Anand Shah. The brokerage has a "buy" on the stock. Of 29 brokerages, 17 have a "buy" or "outperform" on ITC.

Shares in ITC, valued at $17.5 billion, have risen more than 30 percent this year and analysts expect them to rise another 5-15 percent by December.

Nestle India, which has a dominant market share in baby foods, milk products and instant noodles, is expected to outperform because of its low exposure to rural markets. Reuters data shows that of 23 brokerages, 12 rate the stock a "buy" or "outperform" and only three have a "sell" rating.

"We see a 10-15 percent upside from here and it is also a defensive play because of its high exposure to the urban population and its leadership position," said Pragati Khadse, analyst at India Infoline, which has a "buy" on the stock.

Shares in Nestle, a unit of Nestle SA (NESN.VX) and valued at $4.4 billion, have risen 54 percent in 2009.

Khadse said Nestle was also better placed to offset higher costs of milk, sugar and wheat because its urban consumers had deeper pockets.

UNILEVER UNCERTAINTY

Unilever gets about 45 percent of its revenue from the rural market, especially in soaps and detergents.

"On a business basis, HUL is more vulnerable to whatever has been happening on the rural side," said Sharekhan's Ashish Upganlawar.

Of the 29 brokerages tracking the company, more than half have a "hold", "sell" or "underperform" rating. It is normally a key defensive stock for investors in the main index. When the market more than halved in 2008, Unilever shares rose 17 percent.

Unilever missed forecasts with a 2.7 percent fall in June quarter net profit, while ITC beat forecasts with a 17.4 percent rise in net profit.

Shares in Hindustan Unilever, valued at $11.7 billion, have risen 7.4 percent in the last 12 months and about 4 percent in 2009. (Editing by Ranjit Gangadharan and Valerie Lee)