Mumbai: Stocks of companies catering to rural and agriculture markets have largely outperformed the markets after Union Budget 2016-17 proposals to revive growth, employment and consumption in these areas in Asia’s third-largest economy.
In his 29 February budget, Jaitley set aside ₹ 38,500 crore for the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) and ₹ 19,000 crore for the Pradhan Mantri Gram Sadak Yojna (PMGSY). Adding the states’ contribution, PMGSY will get a total of ₹ 27,000 crore.
The funds for PMGSY, a road building scheme, are aimed to increase government spending in rural areas that will create jobs and increase connectivity. In total, the budget allocated a total of ₹ 87,765 crore for the rural sector.
“While we continue to stay positive on urban consumption plays, we expect rural consumption to start rising strongly from September 2016. While the translation of the policy focus to corporate earnings of rural beneficiaries will take at least six months, we expect stocks to start reflecting this optimism,’ Deutsche Bank analysts Abhay Laijawala and Abhishek Saraf said in a 10 March note.
“The first key catalyst for these beneficiaries may emerge when the monsoon forecast is released," they said, adding that key beneficiaries from expected boost to rural consumption are Hero MotoCorp Ltd, Mahindra and Mahindra Ltd, Hindustan Unilever Ltd (HUL), ITC Ltd, Godrej Consumer Products Ltd, Shree Cement Ltd, Ultratech Ltd, Shriram Transport Finance Ltd and Jain Irrigation Systems Ltd among others.
In a note on 9 March, Ambit Capital Pvt. Ltd said the key attributes for a company that would allow it to benefit disproportionally from increased FMCG (fast moving consumer goods) spends by rural households are distribution outreach in rural areas, brand equity, mass and mid-mass positioned brands across packaged goods, hygiene and personal care categories, and a higher percentage of total sales derived from rural areas.
Based on these criteria, Ambit expects HUL, Dabur India Ltd and Colgate-Palmolive (India) Ltd to benefit the most.
Since 1 March, world’s largest two-wheeler maker Hero MotoCorp, which derives around 40% of its demand from rural India, has gained 12.53%. Cigarettes-to-hotels company ITC Ltd advanced 7.12% in the same period, while household and personal care company Godrej Consumer Products added 6.4%.
Cement companies Shree Cement and Ultratech rose 12.5% and 8%, respectively, for the month to date, while truck financing company Shriram Transport Finance rose 15.04%.
The BSE’s benchmark 30-share Sensex has risen 6% in the same period.
“I think the emphasis on rural India and agricultural sector is likely to translate into better demand for consumption-related stocks in these areas. In general, there will be a rally in consumption-related stocks," said Dhananjay Sinha, head of research at Emkay Global Financial Services Ltd.
Rural demand is key for a sustained recovery for consumer goods companies. The increased allocation for rural areas in the budget will ensure some extra money in the hands of the rural consumer, triggering demand for consumer goods. Companies which already have a good rural distribution network may reap the benefits with a shorter time lag.
“The reasons that some of the stocks have not reacted much are specific to those companies. For eg., the restructuring and debt issue is bothering Jain Irrigation stocks. For some companies such as HUL, the stock had already rallied, and has priced in the benefits from increase in rural consumption," added Sinha.
Since 1 March, top tractor and utility vehicles maker Mahindra and Mahindra dropped 1.6%, while the country’s largest personal care company HUL rose 1.5%, with peers Dabur and Colgate advancing 4% and 2.3%, respectively. Leading irrigation equipment maker Jain Irrigation has risen a mere 2.2% during this period.
“People are looking at value and particularly at those stocks where there was a depression in prices due to low volumes and earnings visibility. They seem to be better picks at this point of time," added Sinha.