Victor Hugo, the famous French Novelist and Philosopher who lived in the 19th century, once said “You can resist an invading army; you cannot resist an idea whose time has come.”

Is India’s Rural Theme such an Idea?

 

Before I get into this, let me first address the question as why should we as stock market investors look at long term themes. The reason is simple, when companies participate in long term secular themes the chances that their earnings will sustain for long becomes high. A case in point is HDFC Bank or some of the other private sector banks which had participated in the long term theme of “Private sector banks taking market share from Public sector Banks”. One can see the returns of many of these private sector banks to see the result of playing this simple theme. That being settled lets go back to my original question.

Recently, I had the privilege of meeting a few leaders of Indian business community in a conference. One of the themes that was discussed extensively was the Rural theme.

What’s New? Many analysts and market experts have been talking about India’s Rural theme for the last few years. However, the story has not played out as expected due to

  1. Two back to back droughts in 2014 and 2015
  2. Poor growth in Minimum Support Prices for crops 
  3. Demonetization in November 2016 impacted rural India disproportionately as it has much higher dependence on cash

So, what’s so different now? For one, these negatives are now behind us. Also,

  • 2017 has seen a second consecutive year of normal monsoons and has significant positive implications for rural consumption
  • The schemes like Prime Minister Jan Dhan Yojna  (with 182 million rural beneficiaries.. and growing) and the Direct Benefit Transfer have helped give power of spending to those who needed it the most

The various government schemes have now been running for a few years now. The two slides from an Indusind  Bank presentation posted recently on its website summarizes the points very well:

 

And finally there is the Budget. The MSP for crops was hiked to 1.5 time production cost. This will mean higher realizations for farmers’ agri produce boosting in farm income levels. The focus in many of the measures announced was increasing productivity for farmers.

India is a vast country and many of these schemes will take a long time to have a large impact. However, the stage does seem to be set for a long term secular move towards improving the Rural demand and efficiency.

Companies who derive a large part of their revenue and earnings from participating in the Rural economy should benefit. The most common sectors that analysts talk about are those companies that cater to

  • Rural Consumption like FMCG, Two Wheelers, Footwear, Consumer Durables
  • Improving Rural productivity, like Tractors, Pumps, Irrigation, Fertilizers, Agrochemicals, Seeds
  • Catering to Rural Finance, especially NBFC’s and Microfinance companies

We have recently done a small survey where we had asked people which companies they think will be beneficiaries of the Rural theme over the long term. The top three mentioned names were : ITC, M&M and Godrej Agrovet.

Please do send in your comments on what your view on the Rural theme is and if you believe that this is a good long term theme.  Would also love to hear the companies that you like in this space.

Note: At Marketsmojo you can create a watchlist of the companies that you like based on this theme and can monitor the quarterly performances of these companies using our Current Financial Trend score to see if the theme is playing out. Of course, since this is a long term theme one needs to be a bit patient.