Rural economy is well worth investing in

Opinions about the Indian rural landscape are scattered across both extremes, and so are the verifiable data-points. One opinion is that the rural economy is deeply distressed. Thousands of farmers have committed suicide over the past few years. If we go by news reports, this is because they cannot repay loans. There have been huge farm loan waivers in several states. The past few months have seen widespread agitations by farmers. There have also been demands for reservations by landowning communities, such as the Jats and the Patils.

The Q1, 2017-18, versus the second-half of 2016-17 saw deflation in agriculture. Agriculture growth in real terms, slowed to 2.3 per cent year-on-year in April-June 2017, from 5.2 per cent in Q4, 2016-17 (January-March 2017).

Most analysts expect a slow agricultural performance in Q2— GDP data is due on Friday. Agriculture did well in July-September 2016, with 4.1 per cent growth. So, there might also be a high-base effect. An SBI Research report says Q2, 2017, agriculture growth will be muted because rainfall in the first three monsoon months was hugely deficient in key foodgrain producing states like Uttar Pradesh, Punjab, Haryana, and Madhya Pradesh.

But, multiple analysts are also suggesting that "rural" themes have great long-term growth prospects. "MSP (minimum support price) hikes, Direct Benefit Transfers and farm loan waivers — should drive up disposable incomes" is one line of thought expressed by an influential brokerage. 

The sectors touted include tractors, two-wheelers, fertilisers, pesticides, agro equipment, fast-moving consumer goods (FMCG), affordable housing, etc. Telecom analysts say the underpenetrated rural landscape represents an option for subscriber growth. 

The tractor and automobile companies say volumes are picking up. The FMCG companies concur. The thrust towards affordable housing is oriented towards rural/semi-urban and a pick-up would mean an activity in cement, paints and housing finance. Rural telephony could garner new subscribers although new rural subscribers tend to be low-end customers with low average revenue per user (ARPU). Retails (and e-commerce) are a play on greater connectivity in terms of roads and telecom. Another growth area is renewable energy - solar and even wind are popular off-grid options. 

Are these two views — rural distress versus rural growth — incompatible? Not really. There has been a great deal of agricultural distress over the past two years. This is a politically sensitive issue, which means that the political establishment will be throwing resources into distress management, as elections pop up. Hence, there could be a sharp pickup in rural economic activity. 

The problems in investments are always about timings and valuations. We don't know how long it will take for the rural economy to turnaround. We don't know what exactly policymakers will do and how that will translate into consumption. Nor do we know how the next monsoon will go. So, any investment in the rural economy is fraught with some uncertainty. We don't know if there will be tangible returns within six months, a year, or two years. 

Valuations are off the scale in every sector right now. There isn't a single profitable stock of any size that's trading at a reasonable PE discount — most stocks are valued at about 20-25 per cent above their respective long-term median levels. 

The rural economy is well worth investing in. There's much more scope for growth than in urban areas, due to the low base and suppressed demand. There's one criteria that's likely to be common to all rural plays across all potential growth sectors: Good penetration. Building a rural network and creating rural branding are both difficult tasks. Corporates that have already managed to do this have a very serious advantage over their peers.