Cultivate on the Rural Theme to Harvest Bountiful Returns

India is known for its diversity. This diversity is apparent in its languages, festivals, religions and almost all aspects of society. The same holds true for India’s economy. The Indian economy is complex, with various sectors, public and private enterprises, and significant state intervention in terms of policy and regulatory oversight. Broadly, both the rural and urban sections of the economy are important and reasonably interlinked. It is enthralling to study what constitutes India’s rural economy. Agriculture is just one component of the rural economy; in fact, it accounts for less than half of the total rural output. Over 50 per cent of our total industrial production comes from rural areas. The rural services constitute about a quarter of the total services output. Rural construction amounts to almost half of the total building activity in India. Although rural employment generation has not kept pace with rural industrialisation, there has been significant growth in disposable incomes and aspirations of rural India.


  

The Union Budget 2018-19 was rural oriented. This came as no surprise since the government invited criticism for its inability to contain farm distress. Apart from pledging to double farm incomes by 2022 on the lines of the State of Maharashtra’s Agribusiness and Rural Transformation (SMART) initiative launched by CM Devendra Fadanvis, the Budget apportioned nearly Rs.13 trillion toward generating employment opportunities in rural areas.

The government proposed to fix the Minimum Support Prices (MSPs) at a level of at least 1.5 times the cost of production. Accordingly, in July 2018, the government approved an increase in the MSP of kharif crops (including cotton) for 2018-19. The benefits of this move include an increase in rural wages, higher tractor penetration and improved farm mechanisation. These benefits started materialising from the beginning of harvesting for the ongoing kharif season from October 2018 onward. The higher MSPs are expected to raise the autumn harvest income for farmers by as much as 10 per cent, compared to a fall of 4.5 per cent in the previous year. This is expected to fuel rural demand, at least in the short to medium term. The recent measures supporting the farming sector have heightened the demand for rural-themed stocks. In July 2018, the BSE FMCG and BSE Consumer Discretionary indices rose 1.3 per cent and 1.7 per cent, respectively, and the BSE Auto index rose by 3.6 per cent. In contrast, the Sensex was up by only 0.6 per cent. There are over 263 million farmers in India, constituting a formidable vote bank. To ensure their support, successive governments have announced sops and benefits for the agricultural sector. It has benefited the associated industries directly and indirectly. Let us now examine the performance of rural-themed stocks in recent years.

In order to determine the utility of investing in the rural theme, we computed the historical performance of 11 rural industries vis-à-vis the Sensex. We identified five major companies under each industry and calculated their returns over 1 year, 3 years and 5 years. Moreover, with a view to discern the correlation between elections and the performance of rural stocks, we calculated the pre-election and postelection returns over a period of 6 months for 2004, 2009 and 2014. The results are summarised as follows: 



It is evident that the rural stocks demonstrated significant fluctuations in the period before and after the general elections. Several industries, particularly pesticides and agrochemicals, consumer durables, compressors/pumps and breweries and distilleries, mostly outperformed the Sensex by a noteworthy margin. It is fascinating to observe the association between alcohol consumption and elections. Illegal alcohol consumption and distribution are common occurrences during elections as politicians dole out freebies to garner votes. Some state governments imposed bans on bulk alcohol purchases, while others prohibited consumption altogether.

It is apparent that the performance of nearly all the industries in question surpassed that of the Sensex, particularly due to government focus on rural spending. While some industries like auto and fertilisers produced negative returns in one year; their long-term performance, nevertheless, has been very satisfactory.

Some stocks that particularly stood out include Hero MotoCorp, Dabur India and Mahindra & Mahindra. With the revival in demand and new product launches propelling volumes, Hero MotoCorp has an extensive reach, despite the stiff competition. Dabur India is significant as 45 per cent of its revenue is generated from the relatively under-penetrated rural markets, thereby creating opportunities for increasing market share. Mahindra & Mahindra’s prominence is due to 40 per cent of its passenger vehicles volumes coming from major agriculture states in India. While insufficient monsoon, rising commodity prices, higher advertising and promotional spends and intensifying competition are challenges; these companies are well-placed to reap the benefits of higher MSPs and a potential upgradation in rating. Ultratech Cement’s increased focus on rural penetration has augmented its rural sales’ share to 40 per cent of its total sales.


The aforementioned results can be further summarised by comparing the average performance of the 11 rural industries in question with the performance of the BSE Sensex as follows: 



It is apparent that while the rural industries underperformed considerably in the last one year; they have beaten the BSE Sensex by a remarkable margin in the mediumlong run. The same holds true for the preand post-election periods, as a colossal upsurge in rural support resulted in rural industries outperforming the BSE Sensex appreciably.

In the week post the announcement of the recent state election results, the market rose by over 1,000 points. All sectors, including both mid-caps and small-caps, were a part of this rally. All the Sensexbased stocks were in the green in terms of weekly returns. The total advances far outnumbered the declines. The common theme in the Karnataka elections last year as well as the latest state elections was the impact of rural vote share. The post-poll analysis showed that rural voters have moved away from the NDA. Urjit Patel’s abrupt resignation as the RBI governor further baffled the market. However, the gloom lifted as most stocks again rallied sufficiently to make investors wonder if they were entering a bull market. This is unlikely due to several macroeconomic headwinds. What with most FPIs selling in the Indian markets post-election results, subdued investments from Indian mutual funds, exits staged by institutional investors and the rupee depreciation, sustaining the rally without quality earnings and liquidity seems challenging. It is now expected that the central government will take further steps to woo rural voters with additional benefits and also focus on completing the already announced schemes. In a recent interview, Arun Jaitley explained the progress made on the rural economic front. According to him, agricultural credit ofRs.11 lakh crore will be disbursed through Kisan credits cards and the Jan Dhan Yojana in CY18. Also, the government has sanctioned substantial funds for research and education, the Pradhan Mantri Fasal Bima Yojana and the interest subsidy for the short-term credit to farmers. The government plans to connect each village with a pucca road, complete 100% electrification, provide subsidies to build a toilet in every house and a gas connection for each household. A total amount ofRs.14.34 lakh crore has been allocated for livelihood and infrastructure spends in rural areas. The anticipated accelerated growth in the rural economy from these measures is excellent news for India's consumer goods companies.

Farm loan waiver is a monumental move of the Central and state governments that is drawing attention as the general elections approach. It is largely being used as an instrument to solicit rural votes. The Congress party’s decision to waive off farm loans during the Karnataka assembly elections caused BJP’s defeat, even with the anti-incumbency factor. Similar announcements were made in Rajasthan, MP and Chhattisgarh, resulting in a victory for the Congress in these states. There is a possibility that rival parties will employ the same strategy and announce farm loan waivers to seek votes. This can have serious repercussions on the economy as the government will have to compensate for the lost revenue by levying additional taxes or curbing capital expenditure to keep the fiscal deficit in check. Increasing tax rates before elections would be counter-productive for parties as it would create resentment. Thus, the governments would curb capital expenditure, which would dampen the growth prospects of the state and India at large. This is especially detrimental in the face of meagre GST collections and the rising subsidy bill. An upgrade in ratings seems improbable in such circumstances. Furthermore, the likelihood of El Nino effect in 2019 and reduction in the world GDP forecast to 3.7 per cent from 3.9 per cent by the IMF have diminished the prospects of the Indian economy. Thus, it is of paramount importance that such populist electoral tactics of political parties should be nipped in the bud by asking them to pay for farm loan waivers through party funds and prohibiting them from using government’s tax revenues. Most farmers, in anticipation of write-offs, have refrained from repaying loans, causing substantial disarray by way of higher agri NPAs and bigger bad loan portfolios. This is especially alarming in the face of inflation, fiscal deficit and other stress points associated with bank loans. According to M S Swaminathan, the Father of the Green Revolution, loan waivers, though temporarily necessary for the revival of farming, do not provide conditions for a secure credit system in the long term. Thus, for long term sustainable improvement of the rural economy, the government needs to undertake significant initiatives such as building storage and transportation facilities, rural electrification, crop insurance, improving access to newer techniques and technologies and establishing e-markets like the Electronic National Agricultural Market (e-NAM) to help farmers get remunerative prices for their produce. With the swift penetration of the digital platform across India, the agro-based commodity prices are normalising across states, thereby leading to improved management of inflation and consolidated fiscal position.

Investors can contemplate investing in mutual funds (MFs) with a predominant focus on rural and/or consumption themes. One such MF is the Sundaram Rural and Consumption Fund, which is intended for investors seeking long-term capital growth. Although the fund performed poorly in the last one year by yielding negative returns of 6.9 per cent; its performance over the past 3 years and 5 years stood at 14.7 per cent and 20 per cent, respectively, as against the Nifty returns of 12.5 per cent and 13.4 per cent, respectively. Another notable MF is the Mahindra Rural Bharat and Consumption Yojana. It yielded one-month return of 1.10 per cent as against the 1-month Nifty 200 Total Return Index benchmark return of 1.36 per cent.

For India to transition from a developing nation into a developed nation, rural development is vital. The principal indicators for rural growth include improving tractor sales, volume growth by FMCGs and expanding the agriculture and tractor financing loan book on NBFCs. With enhanced rural income, revival in rural demand, spurt in government spends on farms and an assured MSP with a mark-up on the total cost, farmers have a greater incentive to invest in productivity enhancing goods like fertilisers, agrochemicals and agri-equipment. This has bolstered the demand for agribusinesses, FMCGs and auto companies. Hybrid seeds are the next big thing to further boost farm profitability.

Issues of rural voters will dominate in the months leading up to the general elections in 2019. It is difficult to raise farm prices in the short-run as voters are highly sensitive to inflation. Rural housing is an important factor. With the rising government emphasis on low-cost housing and by awarding it infrastructure status, the prospects of companies operating in this space look optimistic. Increasing spending power of rural India has intensified the need for financial inclusion among the rural masses. Thus, Rural India is well on its way to becoming the prominent theme in the upcoming months.

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