Be selective in rural consumption play

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The investment themes for the festive season revolve around personal consumption. The investment theme for a good monsoon is more varied but a large percentage of that also revolves around personal consumption.

It is, as yet, unclear how much consumption was driven by the Diwali-Dussehra period and a lot of that would have come online at high discounts on online market places. So, the profits from those sales are also difficult to gauge, and even questionable.

However, the monsoon has been fair and there are already signs that the rain has boosted rural, semi-urban sentiments after two years of drought and rural hardship. In fact, agriculture has not had a good time for several years. Although it contributes a small proportion of India's GDP, the agriculture sector generates income for over half of Indian families and it has a multiplier effect in that rural spending always rises after a decent monsoon.

This year could seem especially good for a couple of reasons. The power sector has seen steadier generation through the past year which has certainly made life easier in a lot of rural areas and also probably raised yields for various crops. So, farmers who have deferred capital investments for three years, would also be looking at replacing some equipment.  

There's a wide range of sectors with positive correlations versus good agricultural performance. Volumes of agrochemical sales including both fertilisers and pesticides for instances, tend to be driven up. In both cases, there is an added bonus in that the raw feedstock (which is essentially petrochemicals) is going cheap at the moment due to low international prices of crude and gas.

A second area of strong monsoon correlation is that of tractors, tillers and other agro equipment. We have seen two years of shrinking tractor and tiller sales. A normal monsoon could provide a sharp boost to this sector. In fact, there has apparently been double-digit growth in sales units in these segments. Lower interest rates could also provide a boost since these markets are generally EMI driven.

A third area related to rural and semi-urban prosperity is the two-wheeler market. Bike and scooter sales tend to jump after a good monsoon and again, double digit growth is being reported in two-wheeler unit volumes. Lower interest rates will also have a beneficial impact in this sector, which is entirely driven by EMIs.

The FMCG sector also seeks growth in the semi-rural market, at least partly because urban centres are saturated whereas the semi-rural hinterland is opening up in terms of distribution. The improvement in rural road networks is a major bonus for FMCG players. Other players such as paint companies, mobile telecom service providers will also be looking to increase their rural footprint. So, will consumer durables and white goods manufacturers who are also looking for new markets in the hinterland. It might also be worth looking at rural and semi-rural housing finance.

There should have been some pickup in revenue and in earnings in these sectors in the later stages of the July-September quarter. There should be a more markedly positive effect in the October-December sector. Valuations across these sectors vary considerably and investors would have to be selective. But, this is probably going to be the big play through the next few months. Cyclical rebounds in some of these sectors could result in multi-baggers.
The author is a technical and equity analyst