Policy tilt in favour of farmers likely to win rural votes: Latha Venkatesh
Latha Venkatesh, the veteran editor of CNBC TV18, is an authority on complex macro-economic issues.
We can see her debate in a knowledgeable manner with the eminent luminaries who come on her show.
Generally, she knows nearly as much about the subject as the experts and effortlessly pins them down.
She gave a glimpse of her proactive thinking by opining that NAMO has no option but to woo the rural voters if he has save himself from the onslaught by RaGa in the upcoming elections.
BJP swept urban seats in Gujarat; lost mostly in rural heartland of Saurashtra. States that go to polls next yr – Rajasthan, MP – have larger rural areas than Gujarat. May see policy tilt in favour of farmers; fertilizers, irrigation, rural related stocks may gain.@CNBCTV18News
— Latha Venkatesh (@latha_venkatesh) December 18, 2017
Many in her massive army of followers agreed with her hypothesis.
Wait for the budget Lata, most probably govt will go for large agricultural reforms combining with increase in farmers share in consumers rupee
— Ganesh Jaiswal गणेश जायसवाल (@ganeshmahnar) December 19, 2017
Oh ya! The populist #NaMo is getting ready. BTW, read the news about Deepak Fertilisers and RCF producing ethanol to be mixed with oil? India to have 15% ethanol blended fuel very soon. That's a definite buy on few fertilizer companies.
— Siddhartha Sharma (@krishnatre_sid) December 18, 2017
I am a farmer latha. During kharif in early July we did not have fertilizers due to gst. Net losses this year in karnataka
— Nandini Rajesh Arya (@NandiniRajeshA) December 18, 2017
Unfortunate that farmers were neglected and no good policies for fertilizers, irrigation etc were made. Now Govt will care them because of seats lost in an election. Hope Govt will come with good policies
— Faisal Bava (@Faisalbava) December 19, 2017
Farmer-centric policies necessary for Modi to avoid electoral debacle in 2019: Milind Murugkar
Latha Venkatesh’s view is shared by Milind Murugkar, an expert on political and economic matters.
He has opined that it is “clearly established” that NAMO has suffered a setback in rural Gujarat and that this is bound to shape the BJP’s strategy for the upcoming assembly elections, especially in Rajasthan and Madhya Pradesh, and also for the not-so-distant Lok Sabha election.
“Rural disquiet is palpable across India,” he has warned in a chilling tone.
He has also cautioned that “mere symbolism might not work” and that NAMO will have to bring concrete proposals on the table if he does not want RaGa to walk all over him.
Murugkar has offered a few tangible ideas including that NAMO should lend firm political support to the technology of GM (genetically modified) crops and agricultural biotechnology.
He has explained that Bt brinjal and GM mustard are two crops that have the potential to offer significant economic gains to millions of small farmers.
He has also pointed out that mustard is one of the main crops in Rajasthan and Madhya Pradesh and that NAMO can claim credit for offering farmers the promising technology.
(Image credit: @Atheist_Krishna)
Rural economy is a big theme which will yield multibaggers: Vikas Khemani of Edelweiss Securities
Vikas Khemani of Edelweiss Securities also expressed the view that the time is ripe to tuck into agriculture stocks.
“I continue to remain very bullish on the rural economy as well and there are many stocks around rural economy which have been doing very well, especially in irrigation, around food processing. There are ideas in that segment. I do believe the rural economy is on repair and over the next four-five years that also will do very well. We will have multi baggers coming out of that. So, I do believe that look on those segments and sectors you will do very well,” he said.
Rural India, coming off a low base, and with policy support, could throw up interesting opportunities for equity investors: Macquarie, Citi
“We expect that a rural pivot in policy focus is possible,” Surendra Goyal and Vijit Jain, analysts with Citigroup Inc, opined.
“Rural India, coming off a low base, and with policy support, could throw up interesting opportunities for equity investors,” they added.
This was endorsed by Credit Suisse.
“We doubt if a big fiscal slippage is in the cards, even though the budget speech may focus on rural India and support to farmers,” they said.
Credit Suisse opined that the government will continue with policies to improve subsidy delivery for farmers, more innovations for better price realization for farmers and improvement in the crop insurance scheme.
Aditya Narain of Edelweiss Securities expressed a similar view. He opined that NAMO will demonstrate “less conservative fiscal approach” and place greater emphasis on rural and agri-related sectors.
Best rural/ agriculture stocks to buy for multibagger gains
Now, we have to get on to the most important aspect – the best rural and agriculture stocks with multibagger prospects to buy.
Thankfully, leading experts have already put their minds to work and given us a ready made list of stocks to buy:
Top 10 rural stocks to buy:
Kshitij Anand of moneycontrol.com has cherry-picked ten of the best rural stocks.
(1) Hindustan Unilever: BUY| Target Rs1500| Return 19%
Motilal Oswal maintains a buy rating on HUL with a target price of Rs1500. HUVR is the largest FMCG Company in India by sales. It has the widest portfolio of products and the broadest distribution reach (8m outlets) among its Consumer peers.
Over 40 percent of its sales come from rural India, among the highest proportion of FMCG companies. The brokerage firm was pleasantly surprised by the smart recovery in 2QFY18 to 4 percent volume growth.
As the outlook on the rural economy is improving, so would the potential for healthy sales growth. The latest reduction in GST rates (effective 15th November) from 28% to 18% in key categories like detergents, shampoos, and deodorants will be passed on to consumers, spurring growth further.
(2) Dabur India: BUY| Target Rs410| Return 20%
Motilal Oswal maintains a buy rating on Dabur India with a target price of Rs410. Dabur is one of India’s top 5 Consumer companies in terms of distribution reach – it reaches 5.3m outlets.
The rural outlook appears buoyant. For the first time in three years, companies with high rural sales called out faster rural growth than urban growth or growth at least equivalent to urban growth in 2QFY18.
For Dabur, rural sales grew 11 percent in 2QFY18 against 10 percent YoY growth in its urban sales. Rural recovery from 2QFY18 was earlier than expected – even before the benefits of a near-normal monsoon and government schemes began percolating from 3QFY18.
The much-vaunted earnings revival in the sector appears poised to come through and rural-dependent plays like Dabur are likely to be at the vanguard.
(3) M&M Financial Services (MMFS): BUY| Target Rs500| Return 13%
Motilal Oswal maintains a buy rating on M&M Financial Services with a target price of Rs500. MMFS is one of the most widely-levered NBFCs to the rural economy.
The government’s focus on rural spending coupled with two successive normal monsoons (2016 & 2017) bode well for rural incomes, and consequently, MMFS’ fortunes.
Over FY14-16, MMFS had been severely impacted on the growth and asset quality front due to a slowdown in the rural economy. This was largely attributed to two consecutive subdued monsoons.
However, with growth picking up over the past six quarters and asset quality stabilizing, the domestic brokerage firm believes that the worst is behind.
The stock trades at 2.6x two-year forward standalone BV. The domestic brokerage firm expects further re-rating to continue, given improved growth prospects and return ratios.
(4) Repco Home Finance: BUY| Target Rs800| Return 29%
Motilal Oswal Maintains a buy rating on Repco Home Finance with a target price of Rs800. FY17 was a tough year for Repco Home Finance on several counts – unfavorable regulations (Madras High Court order), severe impact of demonetization and slippage of some high-ticket LAPs into NPL.
With an unfavorable Madras High Court order banning the sale of plots unapproved by the Municipal Authority coupled with the impact of demonetization on the unorganized, self-employed segment, disbursements declined sharply. At the same time, with slippages of some large-ticket LAPs into NPL, the GNPL ratio shot up.
However, there are some signs of a turnaround. Disbursements in 2QFY18 picked up smartly after three sluggish quarters and were only 14% below pre-demonetization levels. Asset quality has witnessed some improvement too, and the provision buffer is healthy now.
(5) Manpasand Beverages (MANB): BUY| Target Rs492| Return 24%
MANB is primarily focused on the rural market. This is evident in its competitively priced small SKUs and continuously-expanding rural distribution network.
In the last one year, its rural outlets have doubled to ~500k. Moreover, with access to 4.5m Parle outlets pan-India, MANB is in a sweet spot to penetrate the rural market across geographies.
The pilot project of distribution of Mango Sip (the company’s flagship product) through Parle’s distribution channel has already commenced in West Bengal and would gradually be implemented pan-India.
(6) Finolex Industries: BUY| Target Rs861| Return 36%
HDFC Securities maintains a buy rating on Finolex Industries with a target price of Rs861.
2QFY18 was a muted quarter for Finolex Industries (Finolex), as (1) despite volume growth, overall revenues grew marginally by 4% YoY to Rs 4.7bn, and realisation per tonne declined in both segments.
The plant shutdown in Q2FY18 led to a ~Rs 360mn increase in costs, which weighed on the company’s overall performance. However, going forward, HDFC Securities believes that there are multiple triggers for Finolex’s volume and profitability growth.
These are (1) Govt’s focus on the agriculture and housing sectors, (2) Company envisages to increase the share of non-agri demand in its revenue pie (from 30% currently to ~50% over four to five years), (3) A ramp-up of higher-margin CPVC volumes over the near term, and (4) GST tailwinds.
Finolex enjoys a pan-India presence, with 850 dealers and 18K retail touch points. Almost 50 percent of the dealers are present in rural areas, and the rest in urban. The company’s operations are focused on South and West India, which contribute over 70 percent to the top-line.
(7) M&M: BUY| Target Rs1652| Return 15%
AxisDirect maintains a buy rating on M&M with a target price of Rs1652. The domestic brokerage firm likes M&M from auto pack given its leadership in tractors and improving share in farm equipment and machinery both in domestic market and exports.
It expects double-digit growth in both tractors and automotive segment over next two years on the back of high rural exposure, normal monsoon and launch of new products.
(8) Mold-Tek Packaging: BUY| Target Rs347| Return 11%
AxisDirect maintains a buy rating on Mold Tek Packaging with a target price of Rs347. The stock is a quasi FMCG play, leadership in in-mould label (IML) based rigid packaging, growing share of food and FMCG sectors leading to expansion of operating margins and continuous capacity expansions.
(9) Jain Irrigation Systems (JISL): BUY| Target Rs140| Return 20%
Karvy Stock Broking maintains a buy rating on Jain Irrigations with a target price of Rs140.It is an Indian multinational company with business interests in manufacturing and export of Hi-tech Agri Input Products, Plastic Piping & Products (PE/PVC pipes and PVC sheet), Agro Processing (De-hydrated onions/vegetables and processed foods) and other businesses including renewable energy.
Thus, the company operates in diverse segments wherein MIS is flagship product which offers end-to-end water solutions projects. The company does not merely sell MIS but also provides Agronomic Extension support, after-sales services and all technical supports for getting better crop returns.
It is a one-stop shop for total agricultural needs. Increased MIS penetration, housing, and infrastructure are government’s priority. Budget FY17-18 envisages agricultural credit at Rs.10,000 bn, long-term Irrigation fund will be of Rs.400 bn, Micro Irrigation fund to be of Rs.50 bn and Pradhan Mantri Krishi Sinchai Yojana (PMKSY) to be of Rs.73 bn. Affordable housing has been provided with infrastructure status.
All these initiatives augur well for Jain Irrigation System which has cutting-edge technologies and leadership position across business verticals. The management has been very aggressive in expanding its geographical reach by way of organic and inorganic growth.
(10) Visaka Industries: BUY| Target Rs800| Return 35%
Karvy Stock Broking maintains a buy rating on Visaka Industries with a target price of Rs800. The company two main business verticals i.e., Building Products (including Cement asbestos and fibre cement boards like V-Boards and V-Panels) and Synthetic Yarn.
It enjoys a strong presence in building products and yarn business. Cement asbestos products continue to be in demand because of the industry efforts of making inroads into India’s rural markets, affordability and other qualities such as corrosion resistance, weather and fireproof in nature.
As per the census of India, 60% of the rural population use thatched roof and tiles (which are Kuccha in nature) and require replacement in every 2-3 years.
Therefore, the company has been expanding its capacities to cater to emerging opportunities.
Return ratios have been expanding consistently between FY15-FY17 and we expect the same trend to continue in future as well. The brokerage firm sees an expansion of 290bps & 250bps expansion in RoE & RoCE by FY20E to reach 13.4% & 14.6% from the current levels of 10.5% & 12.1% respectively.
Top 15 rural stocks to buy: ET Bureau
The experts at ET Bureau have compiled a list of fifteen stocks that will benefit from higher rural spending:
(i) HATSUN AGRO CMP: Rs 842 Target Price : Rs 1,054
The company is expanding procurement infrastructure to boost revenues and backward integration to improve margins. It commands 2x valuation multiple compared to its peers owing to better procurement network (100 per cent direct milk sourcing; 60-90 per cent for peers), shorter cash conversion cycle (70 per cent; 30-40 per cent for peers) and 100 per cent B2C sales (30-60 per cent for peers). We estimate PAT CAGR of 34 per cent over FY17-20E.
(ii) JYOTHY LABORATORIES CMP: Rs 392 Target Price: Rs 462
Jyothi’s Henkel acquisition in 2011 fuelled its initial leg of growth and post lapse of Henkel’s option (Oct-17), JLL is now ready for the next phase. We believe slew of measures would drive JLL’s top-line and profi tability CAGR at 13.1 per cent and 28.3 per cent over FY18-20E respectively. This will lead to contraction in discount vs. peers, and hence, rerating of the stock.
(iii) VARUN BEVERAGES CMP: Rs 516 Target Price: Rs 670
VBL is at a sweet spot to explore huge growth potential owing to low per capita consumption of soft drinks in India. Low capex requirement (with capacity already in place), attractive acquisition strategy (6x EV/EBITDA) and preferred franchisee stature of PepsiCo, augurs well with VBL’s growth. We are factoring 33.3 per cent PAT CAGR over CY16-19E owing to healthy revenue trajectory, lower interest outgo and no major increment in depreciation.
(iv) DABUR INDIA CMP: Rs 350 Target Price : Rs 410
Nearly 50 per cent of Dabur’s domestic sales comes from rural India – the highest proportion among FMCG companies – making it an ideal play on rural revival. For 2QFY18 rural sales grew by 11 per cent, faster than its growth in urban sales at 10 per cent. Worries on both the wholesale channel due to GST implementation and rural sales are receding faster than expected.
(v) MAHINDRA & MAHINDRA CMP: Rs 1555 Target Price: Rs 1,658
MM has the highest dependence on the rural market among key auto OEMs, making it the best bet on rural market recovery due to good consecutive monsoons and loan waivers across states. The government’s target to double farm income in five years will not only help in reducing volatility in tractors, but also catalyze penetration of implements.
(vi) MANPASAND BEVERAGES CMP: Rs 437 Target Price: Rs 492
MANB is primarily focused on the rural market. This is evident in its competitively priced small SKUs and continuously-expanding rural distribution network. In the last one year its rural outlets have doubled to 5 lakh. Moreover, with access to 4.5m Parle outlets pan-India, MANB is in a sweet spot to penetrate the rural market across geographies.
(vii) EPC INDUSTRIES CMP: Rs 165 Target Price: Rs 230
Micro-irrigation is an effi cient irrigation technique and is core to the government’s vision of doubling farm income. EPC Industrie is a leading micro-irrigation player with a market share in excess of 5 per cent. It belongs to M&M group and has a debt free balance sheet. We value EPC at 2.2x MCap/sales on FY19E sales.
(viii) SWARAJ ENGINES CMP: Rs 2,020 Target Price: Rs 2,570
Swaraj Engines is a leading manufacturer of engines supplying to Swaraj brand of tractor owned by M&M. It has a capital effi cient business model with steady margin profi le. It is a good proxy on domestic tractor industry which is on track to clock sales of 6.5 lakh units (12 per cent YoY growth) in FY18E.
(ix) HERO MOTOCORP CMP: Rs 3,700 Target Price: Rs 4,275
Hero Motocorp, is a play on rural theme, given that it is expected to register average volume growth of 9 per cent over FY17-19E, largely driven by demand in the lower 2-W penetrated states (Northern, Central & Eastern India) where it commands >50 per cent market share & new launches in the scooter & premium motorcycle segment in H2FY18E.
(x) MAHINDRA AND MAHINDRA CMP: Rs 1,555 Target Price: Rs 1,637
With good monsoons since last 2 years, M&M is a key benefi ciary of uptick in rural demand given its dominant positioning in tractors, strong recall for its UV brands like Bolero/Scorpio in the rural markets and uptick in demand for pickups (light commercial vehicles) in rural India
(xi) DHANUKA AGRITECH CMP: Rs 715 Target Price: Rs 757
Dhanuka Agritech (DAL) boasts of a unique asset-light business model underpinned by core focus on marketing and distribution network, giving it an edge over competitors. The unique business model renders DAL the preferred partner of global innovators to venture into the rapidly surging Indian agrochemicals market. Moreover, a promising launch pipeline is bound to propel the company’s growth into higher gear.
(xii) JAIN IRRIGATION CMP: Rs 74 Target Price: Rs 129
Driven by the Central Government’s push on Micro irrigation, Jain Irrigation (JISL) being the market leader, is expected to be the biggest benefi ciary of this push. Also, the planned IPO of the agro processing business will help unlock value and help reduce debt further.
(xiii) ESCORTS CMP: Rs 725 Target Price: Rs 800
Government’s focused approach to encourage farm mechanization and growth in infrastructure segment is expected to drive demand for tractors. We expect revenue & PAT to grow at 18 per cent & 37 per cent YoY CAGR over FY17-19E led by higher segmental revenue and new product launches.
(xiv) UPL CMP: Rs 738 Target Price: Rs 887
UPL has achieved healthy revenue CAGR of 16 per cent over FY12-17, with stable EBITDA at 17-19 per cent, despite widespread changes in regional weather patterns or swings in commodity prices and currencies. We expect PAT to grow at a strong CAGR of 14 per cent over FY17-19 led by new launches fast-growing geographies, backward integration, and sustained market share gains.
(xv) CANFIN HOMES CMP: Rs 480 Target Price: Rs 612
Can Fin Homes Limited (CHFL) is the fastest growing HFC with a strong loan book CAGR of 38 per cent over FY12-17. Given the strong traction in loan book expansion and sustained healthy asset quality (Gross/Net NPA at 0.2 per cent/0.0 per cent as of FY17), we expect the return ratios to improve further in the medium term.