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Rural Power

Jitendra Kumar Gupta  |  Mumbai 

Rural Power
/ Mumbai February 16, 2009, 0:56 IST

A large population, rising farm incomes and improving infrastructure translates into opportunities for companies with major rural presence.

If the populations of the world’s largest economies in terms of GDP, namely US, Japan and Eurozone are added, the total would still be a lower than a third of India’s population.


A large population also means a lot of opportunities for companies serving the needs of these individuals. Importantly, about 65 per cent or 13.5 crore households live in rural India, where the opportunities are enormous including those in untapped business segments. For instance, the Indian wireless business has grown the fastest in the world, thanks partly to low penetration levels in the country. Even after many years of high growth, the mobile penetration is still low at under 10 per cent in rural India, thus reflecting the untapped potential.

Although India’s population (almost one sixth of the total world population) is a well known fact, the key is the exponential growth in consumer demand, led by higher income levels and rising aspirations. Over the last one decade (FY 1998-2008), India’s per capita income has more than doubled from $418 to over $1,000. On an average, the per capita income in rural India has grown by 4 per cent annually—or by 50 per cent in ten years. Among key reasons for the latter are the rising commodity prices (Minimum Support Price; MSP), improving productivity and higher production.

Going forward as well, the prospects look better given the government’s emphasis on agriculture growth and rural India. The fiscal incentives such as priority lending to the farm sector, subsidy on farm equipment and agri-inputs and, last but not the least, the Rs 71,000 crore farm-loan waiver are key indicators. Notably, there has been a sharp increase in MSP for many crops in the last two years, more particularly in the last years, which should boost overall farm incomes going ahead.

The increasing availability of basic infrastructure (roads, water, electricity, telephone), improving access to funding, employment guarantee schemes, better information systems and growing literacy are together helping bring prosperity to rural households including the non-agriculture (accounting for about 35-40 per cent) population that reside in rural India.

“If you look at the trend in the last ten years, the difference in rural income growth in first five years and the second five years is vast. That is because of the fact that the basic infrastructure needed to grow is now in place. Today, more people are employed in rural India and their incomes have grown, which should continue with higher compounding. And, rural India is least affected with the global financial meltdown,” says V Shunmugam, Chief Economist, MCX.

In this backdrop and times of uncertainty, investing in companies that cater to the needs of rural India, and are likely to benefit on account of the increasing rural consumption and capex growth is a good strategy.

BHARTI AIRTEL: With every fourth subscriber its user, Bharti Airtel is India’s largest mobile phone company. With urban reaching saturation levels, the company is looking at penetrating the ‘B’ and ‘C’ circles or rural for growth. For the December quarter, over 55 per cent of the company’s net subscriber additions of 2.73 million were from rural areas. In addition to tying up with co-operatives such as IFFCO, to attract the rural consumer, the company offers agri-related information such as commodity prices, weather updates and farming techniques. The company’s expansion into ‘B’ and ‘C’ circles is to get a bigger pie of a market, which is expected to more than double to 250 million by FY12 from 100 million currently. Interestingly, even with 250 million subscriber base in FY12, the penetration of mobile telephony in rural India would still hover around 30-33 per cent (now under 10 per cent) as compared to 70-100 per cent currently in metro and ‘A’ circles. With increasing rural incomes, expect the penetration levels to move up further, thereafter.

While the company’s expansion deeper into rural segment will help it boost volume growth, it is likely to lead to sharp falls in average revenues per user (ARPUs) as competitors drop prices to attract subscribers. ARPUs, which were at Rs 355 levels a year ago and at Rs 321 now, would continue to trend down, as more price-sensitive rural consumers are added to its existing base. More importantly, margins have ranged 30-31 per cent in the last three quarters, helped by higher base and sharing of infrastructure. The company’s urban focus will continue to revolve around services of its Telemedia division, which includes DTH, IPTV, Broadband, fixed line and communication needs of small businesses. While the segment currently contributes just 9 per cent of revenues, it fetches over Rs 1,000 in ARPUs. Going ahead, triggers for the stock could be listing of Bharti Infratel, the tower subsidiary and Indus its tower joint venture with Idea and Vodafone.

CHAMBAL FERTILISERS: India’s low per capita consumption of fertiliser, production deficit, and higher dependence on imports has meant continuous emphasis on agriculture to improve production and farm efficiencies benefitting players such as Chambal Fertilisers. The company is the largest private sector manufacturer of urea (fertiliser) having about 1,500 dealers and 20,000 retail outlets spread in over ten states. Besides fertilisers, the company also has presence in the areas of agri-inputs such as pesticides, micro nutrients, seeds and other imported fertilisers enabling diversification and capturing related opportunities in the sector.

Chambal has been benefiting out of its JV (holds 33.3 per cent stake) with IMACID and Tata Chemicals. This JV manufacturers phosphoric acid (raw material to produce diammonium phosphate or DAP) and has been a key beneficiary of high phosphoric acid prices. Although phosphoric acid prices, which had risen to over $1,400 and have now corrected to about $750-760 per tonne, they are relatively on the higher side.

On the urea front, the approval of new urea policy (in August 2008), where the prices for future expanded capacity has been partly de-controlled, should help companies like Chambal. The gains would accrue in the form of improving profitability and return on equity, through de-bottlenecking and expansion of capacities. On these lines, Chambal is debottlenecking its urea capacity of 1.72 million tonne by 140,000 tonne by April 2009. This, along with the availability of cheap feedstock would mean higher profits. The company has also signed a MoU with Reliance Industries for the supply of the gas from KG basin.

Though its fertiliser business remains on a strong footing in the near term, its other businesses (about 20 per cent of total revenues) —shipping and textile---could be the dampeners to its prospects. Overall, considering that Chambal is a leading player with sizable operation and presence across segments, it should emerge as a key beneficiary of the increased focus on agriculture in the long run.

HERO HONDA: With 60 per cent of its sales coming from rural and given a favourable monsoon and higher MSPs, Hero Honda is likely to grow faster than its peers. Its rural focus, a majority of sales done on cash basis and good performance of its mainstays Splendor and Passion helped the company tot up sales of nearly 30 lakh (9.6 per cent growth) for the first 10 months of FY09. Despite their smaller base and higher export sales, Bajaj Auto and TVS Motors have recorded a decline of 10 per cent and 4 per cent respectively, yielding significant market share to the two-wheeler leader in the process. Given its pricing and the popularity of its bikes in the rural segment, the company may not fully pass on the benefits of lower raw material prices resulting in higher operating profit margins. Despite a dip in volumes (albeit marginally) in the December quarter, lower raw material costs, sales of premium bikes (Hunk, CBZ X-treme and Karizma) and tax breaks on its plant at Haridwar, has helped the company improve its EBIDTA and net margins on quarter-on-quarter as well as year-on-year basis.

While the company’s rural focus will continue with Har Gaon, Har Aangan sales initiative, Hero Honda is also trying to expand its base in Tier-2 and Tier-3 cities by increasing its customer touch points to 3,500 from 3,000 currently. While it has outgunned its competition in every department and deserves a premium, the current price has already factored in these developments. Consider buying on dips.

HINDUSTAN UNILEVER: There is little doubt that individuals in rural areas have deeper pockets these days. The changing consumption pattern led by rising aspirations and higher purchasing power means good growth potential for FMCG companies.

In addition, penetration levels of many FMCG products are less than half in rural areas as compared to urban markets, reflecting tremendous potential going ahead. However, companies which already have a major rural base are likely to benefit the most and one of them is Hindustan Unilever (HUL), which gets around 40 per cent of its revenues from rural areas.

HUL has an extensive reach in the rural areas (aptly reflected in its total reach of 6 million outlets) and implementation of ‘Project Shakti’ (rural initiative) shows its intent on expansion into rural Further, the per capita consumption in Unilever categories is only 33 per cent of those in urban Launched in 2001, Project Shakti, a self-help concept, has turned rural women into direct-to-home distributors of its products and also educates the rural community about basic hygiene. By 2010, the company is aiming a three-fold jump in the number of villages covered to 500,000, which augurs well for its rural prospects. While rural penetration levels of soaps and detergents are relatively high, it is low in case of personal care products (tooth-paste, skin creams and shampoos). Introduction of lower-priced sachets, increasing awareness of oral hygiene and focus on mass-products should help improve sales. Even in case of urban markets, the company has been equally aggressive in terms of introducing new products and expanding its business. Put together, the company is expected to report a 20-22 per cent growth in earnings in FY10.

JAIN IRRIGATION: Greater emphasis on agriculture, under penetration of modern agri-technologies and rising farm incomes make Jain Irrigation Systems a long term play in this space. Jain Irrigation’s business can be classified into three broad categories viz. micro irrigation systems, food processing and plastic pipes and sheets.

Its micro irrigation systems division, which accounts for 50 per cent of total revenues, is the fastest growing business among the three, having grown at about 80 per cent annually in last four years. The company expects this segment to continue to grow at about 45-50 per cent for the next two years. This could be attributed to higher demand from the existing such as Andhra Pradesh, Maharashtra and Gujarat and its entry into other emerging such as Chattisgarh, MP, Rajasthan, Haryana, Punjab and Himachal Pradesh.

More importantly, the penetration levels in new are very low at about 1-1.5 per cent even as compared to 5-8 per cent in existing markets, offering good growth opportunities. Also, with state governments now providing subsidy on these equipment (ranging 50-70 per cent of the cost), the demand should pick up further. As a part of its future growth strategy, the company is also diversifying its product offering to suit different crops helping create new

Jain Irrigation is also the largest domestic food processor, which accounts for over 15 per cent of its total revenues. This business has grown three-fold during FY05-08 to Rs 303 crore. The company is expecting this segment to grow at about 40-45 per cent annually over the next two years on the back of growing opportunities in food processing space (fruit juices, etc), entry into new fruits (bananas, oranges) and expansion of capacities. Meanwhile, key developments such as falling interest rates, lower raw material prices and expected improvement in the future cash flow are key positives in the near term.

PUNJAB TRACTORS: Higher farm incomes, output yields and a low base pushed up Punjab Tractor’s tractor volumes by 33 per cent year-on-year to 26,621 units for the first nine months of FY09. Low tractor penetration (half of world average) and priority sector lending norms (18 per cent of net assets to be allocated to the agriculture sector) are helping the company push up its tractor count. The company’s move to hike prices in the December quarter (raw material costs were up 18 per cent year-on-year in Q3 and, 43.6 per cent for 9MFY09) and cost control measures helped it to maintain operating margins at 12.4 per cent. Further, integration with Mahindra & Mahindra, including vendor rationalisation and better working capital management, should help bring down interest and operational costs.

While there is scope for growth, both on the count of the customer’s ability to pay and penetration levels, lower credit availability from financiers looking to cut their NPAs could be a dampener in the near-term. At current levels, the stock has priced in some of the positives. Investors can look at picking it up at lower levels.

RALLIS INDIA: Within agricultural inputs, agrichemicals is equally promising on account of increasing awareness and low per hectare consumption of about 600 grams (the lowest in the world). The Tata group company, Rallis India with a market share of 13 per cent and a large product portfolio, is the second largest agrochemical company in the country. Rallis operates in the crop protection space, with a small portion of its revenues coming from seeds, nutrients and leather chemicals.

The company has been consistently working towards process improvisation with focus on sustaining lower operational costs, which has resulted in a visible improvement in its profitability in the last few years. Its unique sales strategy, through vast distribution network covering about 80 percent of India’s districts and technical collaborations with global majors, aimed at increasing market share and revenue growth, has also borne fruits.

The company has long-term alliances with leading global agrochemical companies such as DuPont, Syngenta, Makhteshim Chemical Works, Bayer and Borax International, helping it bring new molecules and developing new products for the Indian

Simultaneously, the company has also been eying the exports market to de-risk its business. During FY08, the company obtained joint registration for one of its key products in the US market. While exports currently account for about 20 per cent of sales, Rallis expects its share to double to about 40 per cent over the next 2-3 years. Looking at the medium term prospects, the company is setting up multi-product agrochemical plants in Dahej (Gujarat) and Jammu, which are expected to commence production in 2010. The company recently commissioned a unit to manufacture 100 tonnes of PEKK, which will be supplied to Cytec Engineered Materials of the US and is expected to generate revenues of about Rs 400 crore over the next 3-4 years.
 

RURAL GAINS
in Rs crore TTM ended December 2008 Debt- Equity (x) RoCE (%) RoNW (%) Price (Rs) P/E (x) FY10 PE (x) * Market Cap Dividend yield (%)
Sales % chg Op profit % chg Net profit

% chg

Bharti Airtel 34,961 42.6 14,318 31.9 7,710 32.6 0.45 33.00 39.22 650 16.5 12.4 123,470
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