Fiscal stimulus 2.0: Consumption boost for agri, auto and FMCG companies

Rising farm income to aid firms having a bigger share of revenues from the rural sector

The slew of measures announced by the finance minister, coupled with a robust rabi crop and lower impact of the Covid-19 pandemic on rural India, is expected to improve rural incomes. The focus on agriculture is evident as 65-70 per cent of the outlay in the second and third tranches of the stimulus package was aimed at the farm sector.

Experts believe that steps, such as the Rs 74,300-crore farm produce purchases by the government over the past couple of months, coupled with ongoing procurement, should aid farm incomes. Given that crop output is a key growth driver for rural India, the all-time high production of foodgrain at 295.67 million tonne (MT) expected in the crop year 2019-2020 is a positive trend. The front-loading of the PM-KISAN programme to the tune of Rs 18,700 crore since the lockdown and the expectation of the next tranche in May and June should also help.

Subrata Ray, senior group vice-president, ICRA, says: “Overall, the steps announced by the government to enable farm activities and protect crop realisations for rabi crop will limit the impact of lockdown on the farming community. The structural reforms announced would aid the sector over the medium to long term.” He believes these steps are positive for the two-wheeler and tractor segments. Hetal Gandhi, director, CRISIL Research, says in addition to agri inputs, consumer durables could see an uptick given their low penetration in rural India. About the auto sector, she expects two-wheelers to benefit; for cars, she doesn’t expect any meaningful gain given these are a high-ticket item. FMCG companies with a higher share of rural income is another theme that most brokerages are betting on.

 

While the Covid-19 outbreak so far had a less impact on the Indian agrarian economy, Naveen Kulkarni, chief investment officer at Axis Securities, says the recent forecast of normal monsoon by the India Meteorological Department means the rural economy is likely to perform much better than the urban economy. This theme is strengthened after recent proposals related to the farm sector, he adds. While these are positive trends, downtrading and slowdown in urban markets, labour displacement and lower non-agri rural incomes could play spoilsport for rural consumption.

Auto & farm equipment

Within the auto space, the biggest beneficiary will be the tractor segment. While market leader M&M, as well as Escorts, will be major beneficiaries, VST Tillers Tractors is also likely to gain. Bharat Madan, group CFO at Escorts, says: “Opening of mandis, aggressive procurement of crops by the government, and the gradual opening of banks and NBFCs are positive indicators for a near-term recovery in demand. Going forward, we expect the tractor industry to recover faster than other sectors.” The other segment that could see some traction is the entry-level two-wheeler segment where Hero MotoCorp will be likely a key gainer as rural India accounts for half its sales and the bottom two segments  contribute nearly all its volumes.

Agri-inputs

The government’s steps on the procurement of rabi crop, cash transfer to farmers, and Kisan credit cards, among others, are expected to boost the usage of agri inputs. Given prediction of normal monsoons, the prospects for seed, agrochemical, fertiliser players for the upcoming kharif season have improved significantly. The April sales of fertilisers is a positive trend. Primary sales volumes  spiked 48 per cent year-on-year (YoY) in April 2020, while tertiary sales jumped 45 per cent YoY, suggests the IIFL data. Coromandel’s primary sales of self-manufactured NPK and DAP fertilisers grew 350 per cent in April 2020, helping the company double its pan-Indian market share to 7.4 per cent, from 3.7 per cent a year ago. It is not only fertilisers but also crop protection chemicals which should see improved usage, benefitting players, such as Rallis India, UPL, Dhanuka Agritech, and PI Industries.

 

Fast-moving consumer goods

Companies with a bigger share of rural revenue within the FMCG space can see better growth compared to the urban-focused ones. Companies like Dabur and Asian Paints, which have a strong rural distribution, may stand out in their respective segments. Dabur, in fact, has been expanding its rural reach aggressively since the past few quarters. Among other companies, Marico is expected to gain, according to Motilal Oswal Securities. “With the government’s stimulus package aimed towards providing support to the rural economy, there will be more disposable income in the hands of consumers, which will push demand for Marico’s more resilient products, says the domestic brokerage. However, downtrading, mainly in the personal and home care segment and muted discretionary demand, will be a downside risk.”