Agri growth likely to be 5% in FY14

Companies which have improved rural reach over last few years to gain most from uptick in rural incomes

All eyes are on rural India, even as urban India combats a slowdown. Both consumption and savings are on the wane as inflation burns a hole into pockets.

Consumer companies are reeling with slowing demand as discretionary spends are down sharply, but this is true for only urban India.

Given that 70% of India lives in rural India, where the rains have been timely and good this year, analysts are expecting rural demand to come to the rescue of a sagging economy and consumer companies.

Compared to last year, economists are expecting agriculture to grow by five% in FY14 from the two% seen in the previous fiscal. According to CLSA, area sown is up seven% year-on-year and foodgrain production to reach a record 259 million tonne in FY14.

The brokerage also expects agriculture GDP to rise from last year’s two% to five% this year. Rural India accounts for 56% of India's total income and 33% of India's savings. Both incomes and savings are likely to rise substantially as this year has seen one of its best monsoons in over a decade and a half.

Analysts believe that with Indian companies increasing their reach in rural areas, rural prosperity will improve the fortunes of corporate India too.

Deutsche Bank Global Markets Research has analysed 24 years of monsoon data and the brokerage has concluded that years of above average monsoon rainfall are marked by strong growth in agriculture GDP and correspondingly rising aggregate demand in the rural economy evidenced by high growth in demand for tractors/two-wheelers and four wheelers.

Not surprising then that Maruti is increasing its reach in rural India from 45,000 villages last year to 1,00,000 villages this year. The passenger carmaker derives 35% of its revenues from rural India.

Similarly, 70% of HDFC Bank’s new branches have been opened in semi-urban and rural areas. Shree Cements derives nearly half of its cement sales from rural India.

Mahindra & Mahindra have already seen a sharp pick-up in tractor sales over the last few months and currently the company derives 65% of sales from rural India.

Analysts say that companies that have been focused on growing their rural markets should do well and the festive season would be a good indicator of how strong aggregate demand will be this year, thanks to a pick-up in rural incomes.

ITC, Dabur and Mahindra are CLSA’s preferred picks to play the (rural) theme.