Analysts bet on rural economy theme; Nifty FMCG index hits new high

Analysts remain bullish on rural economy and consumption space, given MSP hike, monsoon

Shares of fast-moving consumer goods (FMCG) ended higher for the second straight session on expectations of a rise in rural consumption, after the Union Cabinet on Wednesday approved a hike in minimum support prices (MSP) for Kharif crops by 1.5 times the input cost, for the 2018-19 season.

The Nifty FMCG index hit a new high of 29,520 on the National Stock Exchange (NSE) in intra-day trade on Thursday, surpassing its previous high of 29,161 recorded on June 13. The FMCG index was the largest gainer among sectoral indices, up 1 per cent at 29,399 points, as compared to a 0.19 per cent decline in the Nifty 50 index on Thursday.

Analysts remain bullish on the rural economy and the consumption space, given the recent development and the fact that weather forecasters—both government–owned and private—are predicting a normal monsoon this year. This, they say, can help boost rural consumption, while keeping a check on inflation.

“The Budget promise, if implemented correctly, will boost farmers’ income, speed up consumption and have a positive effect on the economy. The market cheered this development. A host of companies in the auto and consumer space will reap the benefits of more money coming into the hands of rural India,” analysts at IIFL Wealth Management said in a note.

Among individual stocks, Hindustan Unilever (HUL) gained 1 per cent to hit a new high of Rs 1,692 levels, extending its previous day’s 2 per cent gain on the NSE. While ITC rallied 3 per cent to Rs 273, Emami and Marico were up 1 per cent each on Thursday.

Though the outcome of the general elections scheduled for 2019 remains uncertain, analysts at Nomura think the government will focus on rural and agricultural economy in the run-up to the event.

“There are signs of a pick-up in rural economy, which are reflected in improving volume growth in rural India reported by FMCG companies, improving sales of tractors and automobiles and expanding agri/tractor financing loan book of NBFCs,” said Saion Mukherjee, Neelotpal Sahu and Sanjay Kadam of Nomura in a recent report.

Mahindra and Mahindra Financial Services, Hero MotoCorp, Crompton Greaves Consumer Electrical, Dabur India, and Mahindra and Mahindra are the five stocks Nomura believes will benefit in this backdrop. Besides the forecast of a normal monsoon in 2018-19, the likely absence of disruptive events (like demonetisation or the goods and services tax), a higher minimum support price for Kharif crops, and a robust new launch pipeline and distribution expansion (undertaken by most companies in the last three-four years)—are some of the factors, analysts at Motilal Oswal believe, lend confidence about a further recovery in rural growth.

Hindustan Unilever, Britannia Industries, Emami, Colgate-Palmolive and Dabur are their preferred names to play the rural recovery theme.