Amid reports of farmer suicide and rural distress, farmer suiReligare Capital, together with CNBC-TV18, undertook a road trip in central Uttar Pradesh to ascertain demand conditions that forms the basis of economic activity. The findings reveal that the consumption story in rural UP is not as bad as reported.
Gautam Trivedi, MD & CEO, Religare Capital Markets, who spearheaded the road trip, said the impacted areas were cement and two-wheelers while consumption of FMCG products remain robust. He clarified demand in cement is low because of real estate/construction slowdown. There is of course a slowdown in sales of two wheelers and tractors. But Maruti has shown very good growth, and as new roads come up, sale of Maruti is poised for stupendous growth. "That's the stock to own," he said.
Joining the discussion, Market Research Consultant Rama Bijapurkar said it is true rural India is a 50-shades-of-green canvas with trends changing every few 100 kms. The underdeveloped rural households may see some impact of slowdown, but developed rural is better than a lot of urban areas, she said. In an interesting observation, Bijapurkar said rural infrastructure improvement will have a bigger impact than income improvement.
Talking about tractor growth in rural India, S Sridhar, CEO, Escorts Agri Machinery said industry behaviour of tractors show good growth rate. Demand has sustained where tractors were used for commercial purposes, he said adding sentiment plays a big role — good monsoon etc —boosting demand. He forecasts boom time for tractors from April 2016, stage for which will be set from October 2015 onwards.
Below is the transcript of Gautam Trivedi, S Sridhar and Rama Bijapurkar's interview on CNBC-TV18. Latha: After these three trips, tell us the key takeaways. Is it looking like there is a lot of stress in rural India? We only know of media stories of farm suicides and that unseasonal rain in February which appears to have dampened demand but what was your impression? Trivedi: What we are finding is that the situation on the ground is not as bad as the media made it out to be and yes, there were, there were obviously farmer suicides, we actually went to a village in Beed in the Marathwada district where five farmers committed suicide, specifically in that village. But the fact is that we have picked three of the most impacted states. So, we have not really gone all India and there is probably no need to do all India necessarily. But again, generalising from what we have learned from these three states, the situation is not as bad as it is being made out to be in the media, one. Two, what we are finding is that there are certain pockets of sectors that are clearly very badly impacted. So, you have got cement demand which is clearly down. Again, that is not so much to do with the rural slow down. It is more to do with the slump in the overall real estate sector across the country and the lack of infrastructure really getting off the ground. The second what we discovered is that two-wheelers are largely impacted, tractors are impacted, so we are seeing various industries within even the auto space that are differentially impacted. At the same time, we found that Maruti Suzuki is doing great business. All of the showrooms that we went across to three states and we probably did about seven to eight showrooms, were packed with customers. So rural slow down is having a very limited impact on something like Maruti for example. But, two wheelers are impacted. Commercial Vehicles (CV) are again doing extremely well. So, very interestingly, you have got a very different dynamic that medium and heavy commercial vehicles (M&HCV) are doing very strong numbers but, light commercial vehicles (LCV and intermediate commercial vehicles (ICV) are very badly impacted. So, some of the interesting things coming out. The other thing I want to talk about is the fast-moving consumer goods (FMCG) sector and that took us completely by surprise. We were shocked. In Kanpur, we met the dealer for Godrej, Marico and Cadbury and he said his business for the year ended FY15 was up as much as 22 percent. The first two months of this fiscal are already up 20 percent. So, he is not seeing any slowdown. And we had a similar reaction also in Maharashtra with a Colgate distributer saying his business is rocking, ITC is seeing no slowdown as well. So, very mixed trends emerging from the trip. Latha: Let me just put one argument which is the standard stereotyped arguments that we have got over the last 24 months which is why I am saying it is not a media creation. It was also an economist creation. But, the construction space which was booming in India and we saw it as a share of gross domestic product (GDP) rising over the last 10 years had drawn about 11 percentage point of labour from rural areas. People dependant on rural jobs had fallen from 63 percent to 54 percent over 10 years and that trend reversed. We could see that in rural areas which was put out by the Ministry of Labour, rural wages kept falling over the last one year. They had risen sharply from 2008 to 2012-2013, but 2014, it was falling every month up until November to single digits. So, we were told that there is a rural wage fall issue which is constraining demand. Trivedi: No, we do not buy that. The reality is that farmers have other sources of income. So, it is not only farming and there is a whole bunch of other income sources not to mention that typically one member of the family, especially Uttar Pradesh, even in Bihar and for that matter even in Gujarat, you end up seeing them actually coming to metros, like Mumbai, Delhi or Kolkata and actually getting employment. So, it is not as if the farmer is 100 percent dependant only on farm income. So, that is a clear indication. The other thing I want to talk about really that is interesting, Rama you might want to jump on this is the fact that we believe at the end of these three trips is that food inflation is here to stay. This is a major problem that we are seeing across the country. There are a bunch of reasons for that. Let us get a little sympathetic towards farmers, because they have seen a rapid rise in their input cost, starting with labour. Labour actually has zoomed. In fact, the farmer that we met in Gujarat very clearly said that I really wonder who is going to be doing this business in the next 10-15 years because the reality is the second generation does not want to do farming. They want to work in a urban town or they want to go to Surat and be in the diamond business. So, there are various challenges the farmers are facing – rising pesticide costs, rising fertiliser costs, and after all that it depends on the monsoon. So, I do not think food inflation cost is going down anytime soon, that is something which is actually one of our biggest takeaways from these trips.
Latha: I thought you want to develop on that point that Gautam was making. Rural wages maybe falling, but we have to understand farmer demand from a different perspective. How should we understand rural demand? Rural wages is not an indicator? Bijapurkar: Firstly, looking at rural as a totality is a big problem because the way rural is defined is one minus urban. So, there are 50 shades of green and of course there are districts and places where the share of agriculture is much greater and where share of agriculture in lower. Broadly speaking, I agree with you that our think tank data, our ICE 360 data shows that about 43 percent of income is coming out of agriculture and this varies from place to place. And looking at the trend and what is being sold, I would strongly urge that we start moving from what is being sold to who is actually buying, because it seems the rich are okay. It is the middle that is getting squeezed. And as far as FMCG is concerned, we do know that on a 10 year basis, for the first time in India the lower quintas of income have actually households have grown faster than the urban in terms of income. And if you take that into account, the thing with FMCG, they get lucky when you have a whole lot of people who buy a little bit more each and that adds up to a lot. So, it is true that rural has diversified, it is true that there are 50 shades of green, it is true that if you walked another 150 kilometres, you may see a different pattern of what is being sold. But by and large, it is right that food inflation is here to stay. We are seeing a lot of households where people are, the dual households, as we call them, or non-agricultural households are also much larger and it is my disappointment that at this point in time we should be actually having ore processed food businesses. We should now be making sure that we have our tomatoes that are pureed and everything else because we are not wedded to fresh, we are just wedded to not having to pay Rs 100 for a kilo of beans. I do not know when you last went shopping. Latha: no, only beans were expensive, the rest of it has actually fallen. Reema: So, as strategist, at least one of your notes I was reading, you have diversified it into developed rural, emerging rural and underdeveloped rural. Which segment according to you amongst these three will be going growing faster in the next ten years and therefore pockets of consumption will do well? Bijapurkar: Our ICE 360 data basically, we have divided it up based on census data of a whole set of indicators which are relating to consumption, relating to demographics and so on. Emerging rural, developed rural which is actually about 26 million households, really is as good, in fact better than a lot of urban. And that is really urban itself. So, if you look at the definition of rural, developed rural really comes somewhere between what we call niche cities and boom towns and it is the under developed rural. So, if you divide rural into two, you have 100 million households roughly which are under developed rural and you have the rest of the world. So, the rural urban continuum is blurring and so, what is going to grow if these 100 million start getting infrastructure ahead of everybody else. It is wonderful times ahead for the ITCs and the Levers. The minute you start putting in roads, we find that when public transport grows, private transport grows and you might wonder why do people need to buy when there is public transport. And they tell you when we have nowhere to go, we o not go anywhere and when we have somewhere to go, we actually go at our own time and place. So, you will see different patterns coming up. But, it is really 50 green, at the risk of repeating myself because this is a definitional thing.
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