Home >market >mark-to-market >Stock market traders fall for the ‘buy rural’ narrative, once again

Stock markets love narratives. So when a large institutional broker shouted “buy rural-focused stocks", because the state and central governments will increase rural spending ahead of next year’s general election, traders went and bought the one stock that fits the bill always—Jain Irrigation Systems Ltd. The stock has risen 8.8% in the last two trading sessions.

The rally in Jain Irrigation’s stock is witnessed every time the government presents its budget announcing a plethora of schemes for the rural economy.

But such narrative-based investing has resulted in feeble returns in the past. Unless the government revamps its policies for the rural economy, nothing much will change on the ground for the companies operating in the sector.

Even after successive years of rural-focused Union budgets, shares of Jain Irrigation, Rallis India Ltd and Dhanuka Agritech Ltd have yielded little over the last three years. While Jain Irrigation and Rallis India gained just 3-6% during the period, Dhanuka is down 7%. The BSE 500 index during the time is up 41%.

This is on the back of subdued earnings performance. Production losses due to unfavourable weather conditions and unremunerative prices (partly due to excess production) weighed on farm incomes. This hit rural sentiment, impacting sales.

Sales of Rallis India, a large agrochemicals seller, grew by less than 1% per annum on an average in the last three fiscal years. Dhanuka Agritech and Jain Irrigation delivered relatively better performance, growing by 7% and 8.9%, respectively. But this yielded no noticeable benefits for investors, as can be seen from the stocks’ returns.

The scenario may change in FY19. The government’s increased spending ahead of the general election can give a fillip to the rural economy. Companies such as Jain Irrigation have seen noticeable growth increase in the first half of FY19.

However, it has to be seen how much of this growth recovery is structural. In the run-up to the general election in 2013-14, revenues of all three firms grew 16-26%. Growth petered out in subsequent years as spending normalized. Several brokerage firms are calling this out.

“We find that top-line growth of four sectors namely FMCG, media, agricultural inputs and auto responds to this flow and ebb whereby revenue growth of these sectors tends to rise in the run-up to a general election and then slows," Ambit Capital research said in a note. FMCG is fast- moving consumer goods.

The key, points out an analyst at an institutional broking firm, is farmer realizations, which continue to be weak, influenced by cyclical factors, such as excess production, higher input costs and weather conditions. With large government spends and policies failing to break this, it’s time these measures are revamped. Until then, investors must realize they are only chasing a mirage.

Subscribe to newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Click here to read the Mint ePaperLivemint.com is now on Telegram. Join Livemint channel in your Telegram and stay updated

My Reads Logout