Rural themes at risk as ground reality far from rosy

Analysts worry about possible loan waiver, falling sales of 2-wheelers, tractors and consumer products

The build-up of stress in rural India will have ramifications for corporate India. Falling food prices and crop damage have impacted farm incomes. The sector’s growth is to fall to 1.1 per cent in FY15 due to deficient rains and crop damage. Weak cash-flows will impair consumption and the ability to service debt. The lack of supportive government action will further aggravate the situation. According to Dhananjay Sinha of Emkay Global, declining cash flows will have significant impact on rural themes, including consumer goods, automobiles, agri-inputs and public sector banks.

In a strategy note, Jefferies says it saw Activity Index growth in February hit a nine-month low at 3.4 per cent. Volume growth of cement, steel, consumer goods and two-wheelers are looking weak, say analysts, as government spending on rural schemes has been scaled back sharply.

Cement, too, has seen weak demand in the March quarter. While cement demand rose 9.7 per cent year-on-year (y-o-y) in the first six months of the financial year, the third quarter saw demand grow 4.5 per cent and fourth quarter might be worse.

The stress is so far more visible in tractors and two-wheelers. Hero MotoCorp, which has a strong rural franchise, saw its February volumes decline four per cent y-o-y and 13 per cent month-on-month. With rural demand cracking, investors have turned cautious on two-wheelers. Axis Capital recently held an auto conference as the “glaring gap between the rosy macro and murky ground-level reality couldn’t be bigger”. The brokerage prefers commercial vehicles and cars, but remains cautious on two-wheelers.

Tractor makers are in the midst of its worst down-cycles. Mahindra & Mahindra conveyed to analysts last week that tractor volumes might grow five-seven per cent in FY16, subject to good monsoon, liquidity and lower interest rates. In FY15, tractor volumes declined 15 per cent y-o-y. The market's big worry is centred around public-sector banks. Despite agri growth falling to 1.5 in the December quarter, loans to the sector have been robust. Falling farm incomes might impact the ability to repay. Maharashtra has sought a waiver of Rs 30,000 crore, Andhra Pradesh Rs 45,000 crore and Seemandhara Rs 17,000 crore. While acceleration of bad debts is a distinct possibility, loan waiver is a possibility now. Sinha of Emkay Global says:

“Evidently, the banking sector will have to take the hit once again.”