Bharat comes into play
Feb 02 2014
Firms tapping rural prosperity will gain as aspirations soar, resulting in an accelerated integration of the rural economy into the mainstream economy
Small wonder then, companies have renewed focus on the rural market to reap rich dividends.
Investors smart enough to identify companies that make inroads into the rural areas should benefit in next two-three years. The upcoming general election will also see higher spending across Bharat.
Almost 70 per cent of our country lives in rural India, which accounts for 56 per cent of India’s total income, 64 per cent of total expenditure and 33 per cent of national savings.
“Rural India is set to benefit from one of its best monsoons in 15 years. As per the Indian Meteorological Bureau, India’s monsoon rainfall in 2013 has been 5 per cent above normal, with 30 out of 36 sub-divisions reporting normal or excess rainfall, making this among the best monsoon…,” said Deutsche Bank, in a note.
Despite the low direct share of agriculture in India’s GDP, rural prosperity has been a key driver of the overall economy. “Years of above average monsoon rainfall have been characterised by rising rural prosperity and with India Inc progressively increasing its distribution footprint into rural India, we expect the multiplier impact of rural prosperity to be higher in the current year relative to previous years of strong monsoons. Our analysis of 24 years of monsoon data leads us to conclude that years of above average monsoon rainfall are marked by strong growth in agricultural GDP, and correspondingly, rising aggregate demand in the rural economy evidenced by high growth in demand for tractors/2W/4W etc,” Deutsche Bank analysts Abhay Laijawala and Abhishek Saraf said in the note.
So, what does it mean for India Inc?
It means a lot for companies that sell soaps and shampoos, two-wheelers and four wheelers, tractors, mobile phones, fertilisers and even small loans, including home loans, as rural aspirations soar.
Ambit Capital’s Saurabh Mukherjea says passenger car makers such as Maruti Suzuki would benefit from increasing focus in rural markets. There have been fundamental changes that have unfolded in rural India. These fundamental changes (in order of importance) include: (1) boom in road connectivity, (2) rise in rural teledensity, (3) a dramatic increase in land prices in the villages, (4) rise of blue-collar wages, and (5) increase in social spending by states and the Centre, Mukherjea said.
Ambit Capital highlighted stocks such as Idea, Dish TV, Ramco Cements and M&M as compelling plays on this underlying rural theme. There are others, like Mahindra Financials, which are benefitting from increased small loans to people in the hinterland.
How could investors play the rural/monsoon theme?
With urban India seeing muted growth on rising interest rates and high inflation, investors must focus on companies that have invested in building a presence in rural India. Our rural picks constitute the following: M&M and Maruti should be key beneficiaries in the auto sector (65 per cent and 30 per cent of their respective sales are from rural India). Maruti aims to increase its distribution reach to 100,000 villages this year versus 45,000 last year). Bharti (43 per cent of subscribers are rural), ITC (more than 50 per cent of cigarette revenues from rural India), HDFC Bank (more than 70 per cent of branch additions over past three years has been in semi urban and rural areas), M&M Financials (20 per cent of its AUM is in tractors). Shriram Transport, Grasim and Shree Cements (40-50 per cent of cement sales derived from rural and semi urban India) and NHPC (benefitting from higher reservoir levels), according to Deutsche Bank.
Rural India is increasingly integrating with the mainstream.
The prime minister’s economic advisory council expects FY14 agri GDP to rise by 4.8 per cent in FY14. Rising penetration of mobile telephony, internet and satellite television coupled with increasing road connectivity (70 per cent of India's villages are now connected by all weather roads) and rising aspirations have resulted in an accelerated integration of the rural economy into the mainstream economy.
Why is Deutsche Bank confident of a strong recovery in rural demand in 2013-2014?
“Our confidence in estimating strong rural demand from high agricultural production stems from: (1) area sown under autumn kharif crop is 5 per cent higher YoY (2) 30 out of 36 meteorological sub divisions have seen either normal/above normal rainfall making the season among the best in terms of spatial distribution in 15 years (3) water levels in India’s reservoirs stand at 15 per cent above last year’s levels (4) agriculturally critical months of June and July this year received extremely good rainfall which has facilitated extensive crop planting (5) horticulture crop which yields significantly higher margins than food grains should also benefit immensely leading to higher farm incomes and (6) high water tables are likely to encourage multiple cropping which should lead to higher cash flows for farmers,” it said.
Recently CLSA also undertook a trip to rural India viz., Hathras, about 150 km from Delhi, in the state of Uttar Pradesh, to study the phenomenon ranging from rising rural spending on the back of higher food prices and rising income.
The two-laned road to Hathras, off the expressway, was full of trucks carrying the recently harvested paddy to the nearby procurement centres, said CLSA analysts Mahesh Nandurkar. The trip “gave us a feel of a positive impact of the higher farm productivity as well as prices for agri produce,” they wrote in a note.
“Stronger rural income has driven a 50 per cent retail sales growth at Hathras, a contrast to weak SSS (same store sales) numbers reported by urban counterparts. Food inflation, a big problem for cities, is boosting farm incomes. Clearly, the mood in villages is not as sombre as the cities. This can have meaningful political implications, something which the stock market may not like,” the CLSA analysts said.
Store managers at ITC’s rural mall-cum-agri collection centres reported a strong festive season (sales up 50 per cent YoY), which sharply contrasts with the tepid same store sales (SSS) reported by urban retailers and restaurants.
Furniture has been a best-selling item lately. Clearly, higher farm production combined with better produce prices is driving rural consumption, according to CLSA.
Axis Capital’s Hemant B Patel and Nandan Chakraborty said they expected rural growth to remain strong due to structural non-farm income growth as well as good monsoons, though extended monsoons in Gujarat/Maharashtra have spoilt a small proportion of crops.
Fertilisers and tractors are the obvious beneficiaries, it said. “Non-farm income growing structurally as connectivity (physical and multimedia) increases the capacity to set up hugely profitable rural businesses (livestock and other non-farm); increased land prices have pushed farmers to switch land parcels to cheaper and larger outlying tracts, which are now also connected, leaving some extra wealth, usually in gold. Rural remittances have also been increasing as educated youngsters move to urban centres to become analysts (oops!) — oldies find cities too expensive,” the Axis analysts said.
Axis Capital has a buy recommendation on HDFC Bank, Bajaj Finance, Coromandel International and Godrej Industries based on their increasing rural focus.
To sum up, there are potential winners, several of them, in rural markets. It’s time to play the rural theme seriously — an occasion not to be missed.