Time to buy ‘Rural’ theme? Top 10 stocks which could give up to 35% return

“Corporate commentary following the 2QFY18 results from B2C sectors like FMCG, Autos, Durables, and Retail reaffirms our view. Quite a few FMCG companies see rural growth outpacing or at least matching urban growth after many quarters,” it said.

Auto companies like Hero MotoCorp, M&M and Escorts also highlighted rural growth recovery. India Inc. expects the demand trends to strengthen as we move into 2HFY18.

“Our observation about rural economic pickup confirms the same. A good harvest in 2016 and 2017 season coupled with better MSPs has helped lessen the rural distress and pick up in rural consumption over last 2 years,” Arun Thukral, CEO, and MD, Axis Securities told Moneycontrol.

“The disbursals of 7th pay commission awards also helped the cause. Improvement in rural demand has positively impacted the sectors FMCG, Auto, consumer durables etc. This is very much evident from the volume numbers for FMCG or consumer durables and auto sales number for 2 wheelers/passenger vehicles,” he said.

Thukral further added that going forward, the rural economy is expected to fare well; the confidence emanates from the management commentaries about better H2FY18 vs H1FY18.

Here is a list of top 10 wealth-creating ideas from the rural theme which investors can look at buying with a long-term time horizon:

Hindustan Unilever: BUY| Target Rs1500| Return 19%

Motilal Oswal maintains a buy rating on HUL with a target price of Rs1500. HUVR is the largest FMCG Company in India by sales. It has the widest portfolio of products and the broadest distribution reach (8m outlets) among its Consumer peers.

Over 40 percent of its sales come from rural India, among the highest proportion of FMCG companies. The brokerage firm was pleasantly surprised by the smart recovery in 2QFY18 to 4 percent volume growth.

As the outlook on the rural economy is improving, so would the potential for healthy sales growth. The latest reduction in GST rates (effective 15th November) from 28% to 18% in key categories like detergents, shampoos, and deodorants will be passed on to consumers, spurring growth further.

Dabur India: BUY| Target Rs410| Return 20%

Motilal Oswal maintains a buy rating on Dabur India with a target price of Rs410. Dabur is one of India’s top 5 Consumer companies in terms of distribution reach – it reaches 5.3m outlets.

The rural outlook appears buoyant. For the first time in three years, companies with high rural sales called out faster rural growth than urban growth or growth at least equivalent to urban growth in 2QFY18.

For Dabur, rural sales grew 11 percent in 2QFY18 against 10 percent YoY growth in its urban sales. Rural recovery from 2QFY18 was earlier than expected – even before the benefits of a near-normal monsoon and government schemes began percolating from 3QFY18.

The much-vaunted earnings revival in the sector appears poised to come through and rural-dependent plays like Dabur are likely to be at the vanguard.

M&M Financial Services (MMFS): BUY| Target Rs500| Return 13%

Motilal Oswal maintains a buy rating on M&M Financial Services with a target price of Rs500. MMFS is one of the most widely-levered NBFCs to the rural economy.

The government’s focus on rural spending coupled with two successive normal monsoons (2016 & 2017) bode well for rural incomes, and consequently, MMFS’ fortunes.

Over FY14-16, MMFS had been severely impacted on the growth and asset quality front due to a slowdown in the rural economy. This was largely attributed to two consecutive subdued monsoons.

However, with growth picking up over the past six quarters and asset quality stabilizing, the domestic brokerage firm believes that the worst is behind.

The stock trades at 2.6x two-year forward standalone BV. The domestic brokerage firm expects further re-rating to continue, given improved growth prospects and return ratios.

Repco Home Finance: BUY| Target Rs800| Return 29%

Motilal Oswal Maintains a buy rating on Repco Home Finance with a target price of Rs800. FY17 was a tough year for Repco Home Finance on several counts – unfavorable regulations (Madras High Court order), severe impact of demonetization and slippage of some high-ticket LAPs into NPL.

With an unfavorable Madras High Court order banning the sale of plots unapproved by the Municipal Authority coupled with the impact of demonetization on the unorganized, self-employed segment, disbursements declined sharply. At the same time, with slippages of some large-ticket LAPs into NPL, the GNPL ratio shot up.

However, there are some signs of a turnaround. Disbursements in 2QFY18 picked up smartly after three sluggish quarters and were only 14% below pre-demonetization levels. Asset quality has witnessed some improvement too, and the provision buffer is healthy now.

Manpasand Beverages (MANB): BUY| Target Rs492| Return 24%

MANB is primarily focused on the rural market. This is evident in its competitively priced small SKUs and continuously-expanding rural distribution network.

In the last one year, its rural outlets have doubled to ~500k. Moreover, with access to 4.5m Parle outlets pan-India, MANB is in a sweet spot to penetrate the rural market across geographies.

The pilot project of distribution of Mango Sip (the company’s flagship product) through Parle’s distribution channel has already commenced in West Bengal and would gradually be implemented pan-India.

Finolex Industries: BUY| Target Rs861| Return 36%

HDFC Securities maintains a buy rating on Finolex Industries with a target price of Rs861.

2QFY18 was a muted quarter for Finolex Industries (Finolex), as (1) despite volume growth, overall revenues grew marginally by 4% YoY to Rs 4.7bn, and realisation per tonne declined in both segments.

The plant shutdown in Q2FY18 led to a ~Rs 360mn increase in costs, which weighed on the company’s overall performance. However, going forward, HDFC Securities believes that there are multiple triggers for Finolex’s volume and profitability growth.

These are (1) Govt’s focus on the agriculture and housing sectors, (2) Company envisages to increase the share of non-agri demand in its revenue pie (from 30% currently to ~50% over four to five years), (3) A ramp-up of higher-margin CPVC volumes over the near term, and (4) GST tailwinds.

Finolex enjoys a pan-India presence, with 850 dealers and 18K retail touch points. Almost 50 percent of the dealers are present in rural areas, and the rest in urban. The company’s operations are focused on South and West India, which contribute over 70 percent to the top-line.

M&M: BUY| Target Rs1652| Return 15%

AxisDirect maintains a buy rating on M&M with a target price of Rs1652. The domestic brokerage firm likes M&M from auto pack given its leadership in tractors and improving share in farm equipment and machinery both in domestic market and exports.

It expects double-digit growth in both tractors and automotive segment over next two years on the back of high rural exposure, normal monsoon and launch of new products.

Mold-Tek Packaging: BUY| Target Rs347| Return 11%

AxisDirect maintains a buy rating on Mold Tek Packaging with a target price of Rs347. The stock is a quasi FMCG play, leadership in in-mould label (IML) based rigid packaging, growing share of food and FMCG sectors leading to expansion of operating margins and continuous capacity expansions.

Jain Irrigation Systems (JISL): BUY| Target Rs140| Return 20%

Karvy Stock Broking maintains a buy rating on Jain Irrigations with a target price of Rs140.It is an Indian multinational company with business interests in manufacturing and export of Hi-tech Agri Input Products, Plastic Piping & Products (PE/PVC pipes and PVC sheet), Agro Processing (De-hydrated onions/vegetables and processed foods) and other businesses including renewable energy.

Thus, the company operates in diverse segments wherein MIS is flagship product which offers end-to-end water solutions projects. The company does not merely sell MIS but also provides Agronomic Extension support, after-sales services and all technical supports for getting better crop returns.

It is a one-stop shop for total agricultural needs. Increased MIS penetration, housing, and infrastructure are government’s priority. Budget FY17-18 envisages agricultural credit at Rs.10,000 bn, long-term Irrigation fund will be of Rs.400 bn, Micro Irrigation fund to be of Rs.50 bn and Pradhan Mantri Krishi Sinchai Yojana (PMKSY) to be of Rs.73 bn. Affordable housing has been provided with infrastructure status.

All these initiatives augur well for Jain Irrigation System which has cutting-edge technologies and leadership position across business verticals. The management has been very aggressive in expanding its geographical reach by way of organic and inorganic growth.

Visaka Industries: BUY| Target Rs800| Return 35%

Karvy Stock Broking maintains a buy rating on Visaka Industries with a target price of Rs800. The company two main business verticals i.e., Building Products (including Cement asbestos and fibre cement boards like V-Boards and V-Panels) and Synthetic Yarn.

It enjoys a strong presence in building products and yarn business. Cement asbestos products continue to be in demand because of the industry efforts of making inroads into India’s rural markets, affordability and other qualities such as corrosion resistance, weather and fireproof in nature.

As per the census of India, 60% of the rural population use thatched roof and tiles (which are Kuccha in nature) and require replacement in every 2-3 years.

Therefore, the company has been expanding its capacities to cater to emerging opportunities.

Return ratios have been expanding consistently between FY15-FY17 and we expect the same trend to continue in future as well. The brokerage firm sees an expansion of 290bps & 250bps expansion in RoE & RoCE by FY20E to reach 13.4% & 14.6% from the current levels of 10.5% & 12.1% respectively.

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