Taking into account this improvement in rural demand, BofA has raised its view on staples from underweight to overweight, and has reiterated its marginal overweight skew on autos.
“Our analysis suggests robust Rabi production, normal monsoons likely driving good Kharif yields, coupled with elevated agriculture prices (above MSP in most cases) and government subsidies curtailing cost pressures, could mean 10-12% YoY rise in net farm incomes. Further, front loading of infrastructure spends could also boost non-agriculture incomes, with wages also stabilizing. Our channel checks corroborate these findings,” read the report.Also read: Why a good monsoon may not be enough to signal revival in rural demandWhile volume of rural sales had declined YoY through all quarters of FY22 and this decline worsened in the last quarter, the report stated that rural demand could be close to a bottom with recovery likely in one or two quarters.
“ On the agriculture side, we see this being aided by: 1) good rabi (winter crop) income from wheat, pulses & oilseeds (85% of total rabi income per our analysis). The government's 2nd advance estimates for their production indicate 2%-9% YoY growth (see upside risk with scrutiny of long term actual production data pointing to beat to these estimates on average) and realizations currently up by 16-22% YoY (>MSP in most cases). 2) Expectation of a normal monsoon could also translate into a good Kharif (monsoon crop) harvest-a trend seen historically. If elevated food prices sustain on the Ukraine crisis dragging on, we estimate kharif incomes to be up 17% YoY, on an already high base (15% growth in FY22),” it said.It added, “we see a robust 12%/10% likely YoY rise increase in net farm income from rabi and kharif harvests.”
Input costs in farming have gone up by 24 percent YoY but BofA expects government subsidies for fertilisers, waive offs in electricity spends and so on to result in a net lower cost rise at 7 percent.
Non-agricultural income is expected to get a boost on the government’s spend on rural infrastructure.
The report enumerates indications of improved non-agri incomes. “1) Government's spend on rural infra schemes remains high (FY19-23e CAGR 17% vs 8% pre pandemic); 2) US$25bn (c.20% of non-crop agriculture GVA) is budgeted for these rural schemes in FY23 & our channel checks reveal government plans to front load this capex to support rural growth; 3) non-agri. wage growth is off-lows & is stabilizing (at LTA now); 4) attendance in the rural employment guarantee scheme (MGNREGA) has dropped below pre-pandemic avg., likely indicating better availability of alternate job opportunities,” it said.
Also read: Price hikes begin to weigh on consumer demand: NomuraHow to play this themeWith rural sentiment improving, opportunities seem to be present in staples, select autos and NBFCs, and cement sectors.“Staples companies have significant rural exposure (up to 40%) and their having stepped up rural distribution post pandemic (no of distributors up 42% vs FY20) could serve as a catalyst for accelerated gains on likely rural turnaround. We see cement (40% rural exposure) & rural focused NBFCs are other stocks exposed to the theme,” said the report.Its analysts recommend Buy for UltraTech Cement for its pan-India presence and strong capacity addition, and Mahindra and Mahindra Financial Services for inexpensive valuation, improving its asset quality and focussing on rural affluent.The rural recovery also acts as a positive for tractors and two-wheelers. The sector could see “1) +3-5% industry growth for tractors vs. earlier expectation of decline in F23-our dealer discussion reaffirm this (sentiment change vs. Oct); and 2) Ray of hope for 2W industry esp. entry bikes after 3 consecutive years of decline (+7-8% growth BofAe F23),” said the report. Its analysts recommend Buy for Mahindra and Mahindra, for improving their earnings from auto and tractor bottoming out. They recommend Neutral for Hero Honda, expecting the stock to do well in the near term with its favourable valuation, its 50% rural mix, supply-side strength compared to peers and e-scooter launch. They are also Neutral on Escorts with valuation pricing in any likely gains.Disclaimer: The views and investment tips of investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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