In the run up to 2019 Lok Sabha polls, sectors like basic consumption (staples), low- to mid- income housing, agri, and rural consumption could be in focus.
The ascent of Yogi Adityanath to the top job in India’s politically most important state is ripe with significance for markets precisely because it underlines a trend of addressing the bottom of the pyramid that has gained ground over the past year.
Make no mistake: the choice of Adityanath is not about building a temple at Ayodhya, or at least, not just about that. You need only to look back to the early days of Narendra Modi to get a sense of what could be coming. The similarities between Modi 1.0 and Yogi are striking: Hardline Hindutva (and accusations of abetting communal violence), the RSS influence, the energy born of meditation and yoga, and last but not least, the ‘single’ status seen as precluding the need to amass wealth.
This is what gave birth to the Gujarat Model – zero tolerance for inefficiency and corruption, efficient administration and a focused development agenda.
Of course, Uttar Pradesh is no Gujarat. It’s an integral part of the uncomfortable BIMARU grouping whereas Gujarat has always been a rich state. And it’s early days to conclude that the monk from Gorakhpur will achieve anything like the outcomes Modi got in his state. But the election result means that the economic agenda of Modi at the Centre will get implemented by his lieutenants, and Yogi is now formally one of them.
Expect the following agenda to gain ground in the next couple of years leading into the Lok Sabha polls of 2019. The first is derived from the election slogan 'sabka saath sabka vikas’ – Modi is a friend of the poor, contrary to his earlier image of a friend of the traders. Second is the crusade on black money and corruption and finally an end to crony capitalism: Political connections will no longer pave the road to success. The recent move of demonetisation dovetails well with these agendas.
In the run up to 2019, the theme that will have significant investment implication is the improvement in the economic condition of people who are really at the bottom of the pyramid, and there are plenty in UP. This is unlikely to be achieved through runaway increase in subsidy; directed subsidy will get further expanded into more areas and a possible introduction of Universal Basic Income that subsumes myriad grants from the state may be on the anvil.
The sectors that should get a fillip are basic consumption (staples), low- to mid- income housing, agriculture, and to some extent rural consumption. Our research throws up several interesting ideas on these themes and we urge investors to opportunistically build up positions amid market gyrations.
Housing for all by 2022 is definitely a pet project of the government that should continue to get disproportionate attention. Building materials and electrical companies focusing on entry level products should find favour.
Rural housing forms 40 percent of overall cement sales in India, which is largely supported by agricultural income and rural wages.
The other set of companies that should benefit from the focus on housing are mid- to-low ticket size housing finance companies focused in rural and semi-urban areas. Gruh Finance, Repco Home, GIC Housing and LIC Housing are some of the players in this category.
Alongside housing, more money either as grants or earnings should spell good news for staples as well as entry- level discretionary consumption companies. While valuation comfort in this space is limited at this point, any earnings surprise could contribute to alpha returns.
Agriculture which supports earnings of nearly 70 percent in rural India will be at the heart of any proactive government’s policies in our country and should see improved prospects unless the monsoon plays spoilsport. Agrochem, fertiliser, farm equipment companies should benefit from this trend.
Reduction in leakages and a move to DBT (direct benefit transfer) for a significant proportion of subsidies would also give more cash in the hands of farmers to modernise. On the agrochem side, growth rates for agrochem players would be supported by rising adoption of high-value molecules, rising adoption of herbicides and fungicides.
While markets aren’t really cheap, investors should gradually build up position in these promising areas that are likely to benefit from the Modi-Adityanath kind of political dispensation.