Budget 2019: Status quo for consumption stocks; Pick-up in monsoon & cheaper inputs key triggers

Companies with stable outlook to remain in focus –Marico, HUL, ITC, Britannia

Post interim Budget, earlier this year, macro backdrop and domestic consumption had further weakened, which led to a clamour for increased stimulus in terms of assured income support, higher allocation for subsidies and rural allied sectors.

Given the fiscal constraints, a substantial allocation change compared to the interim Budget was not pragmatic, but tweaks in allocation to emphasise the intent and a road map were expected. Largely on those lines, the Budget signalled “more of the same” in terms of its focus on improving the prospects for rural allied sectors.

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Income support/Subsides

In the run-up to the Budget, the government had already increased its allocation for assured income support scheme for farmers. Pradhan Mantri Kisan Samman Nidhi (PM-KISAN), which was announced in the interim Budget and spoke of direct income support for marginal farmers, was extended to all farmers, from marginal ones.

So, this Budget, we expected increased support for farm subsidy schemes. Allocation for both Urea and nutrient-based subsidy has further increased as against the interim Budget.

Chart: Budget allocation for subsidies (Rs crore)

Source: http://www.indiabudget.gov.in

Steady focus on food processing industries

Weak translation of MSP (Minimum Support Prices) as an effective crop buying price has emerged as a focused attention for the government. While recently there has been a moderate increase in MSP for kharif crops, the government is also taking steps so that farmers get a fair price for their produce. For this, the Union government plans to work with states to allow farmers to benefit from e-NAM (National Agriculture Market) – an online trading platform for agricultural commodities.

Furthermore, the government plans to form 10,000 new Farmer Producer Organisations, to ensure economies of scale for farmers over the next five years. These steps are expected to streamline procurement, dis-intermediation and better pricing for farmers.

In case of food processing industries, the FY20 Budget estimates on schemes for food processing are same as the interim Budget, but higher by 26 percent than the FY19 revised estimates.

Chart: Budget allocation to food processing schemes (Rs crore)

Source: http://www.indiabudget.gov.in

Non-farm productivity – Focus on dairy and aqua

Aquaculture and dairy sectors continue to gain incremental attention as they have also been among the most stressed sector in recent times. Compared to the interim Budget, there has been a higher allocation for the dairy sector. The Budget emphasised that dairying through cooperatives will also be encouraged by creating infrastructure for cattle feed manufacturing, milk procurement, processing and marketing.

Further, under Pradhan Mantri Matsya Sampada Yojana (PMMSY), the Department of Fisheries would establish a robust fisheries management framework to address critical gaps in the value chain, including infrastructure, modernisation, traceability, production, productivity, post-harvest management, and quality control.

Chart: Budget allocation to agriculture allied sector (Rs crore)

Source: http://www.indiabudget.gov.in

Overall, the Budget proposals have a status quo implications of the consumption revival in the near term. We believe that this brings investors focus to Q1 FY20 earnings season to assess the domestic staple demand trends.

Recent updates from the select companies – Godrej Consumer, Marico and Prataap Snacks – suggest that moderation in demand environment continues. Key offsetting factor for now is the broad-based moderation in input cost such as packaging cost, mentha oil and palm oil for consumer companies.

Going forward, quantum and spatial distribution of monsoon would be key factor to watch. We continue to prefer companies which are deploying internal accruals such as cost savings or utilising super normal profit from other product groups. ITC and Marico stand out here, where they deploy profits from cigarettes and lower copra prices, respectively, for new product categories. While there is a nominal increase in basic excise duty for tobacco products, the tax regime appears largely stable for the company. In the case of Marico, steeper correction in copra prices compared to expectations is positive. Furthermore, Marico, along with Britannia, benefits from higher exposure to urban demand, which is relatively stable.

Additionally, we believe that one should watch for companies making inorganic ventures or restructuring initiatives which open up promising sub-segments, in addition to synergistic benefit such as HUL-GSK (Health & Nutrition) and Tata Consumer Products (Food & Beverages). Follow @anubhavsays

Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here