Reaping the agri bonanza
The Budget has been populist and rural-oriented in its focus. The minimum support price (MSP) for agricultural produce is being bumped up; there are also large allocations to rural infrastructure, including roads and optic-fibre networks. Multiple state governments, which are also up for Assembly elections in the next year or so, are likely to follow suit with handouts for rural voters.
This might lead to macroeconomic under-performance in some ways because there will be low returns on a lot of that money. However, political compulsions always trump economic rationality in the last year of any government's term.
The government has also reiterated a commitment to double farmers’ incomes by 2022. Given that this requires a compound growth rate of about 18 per cent, this is impossible in real terms, net of inflation, and it would be a tough ask in nominal terms unless there was massive inflation all round.
But some attempt to deliver on this promise is being made and that implies a definite boost for rural purchasing power. Life has been terrible for farmers for the last two years with demonetisation adding to the misery of poor monsoons. Rural distress has clearly been a factor in triggering agitations from the Patel, Maratha, Jat and other agrarian communities. So, a rebound, one way or another, could also benefit from a low base effect.
The Budget clearly hopes to apply a booster dose for growth in rural-oriented businesses, and especially in agro-oriented businesses. The obvious picks for investors would be farm equipment companies like tractor and tiller companies, fertiliser and insecticides makers and seeds suppliers.
Beyond that circle of “primary” agrarian companies, there could be a significant revenue boost for FMCG companies, which have suffered flat rural growth in the last two years. There could also be a pick-up in sales for two-wheeler companies, which have a big rural market. There may also be some movement on the affordable housing front since there is clearly a connection with rural well-being.
Of course, a lot depends on the monsoon. While the government might be geared up for higher MSP payments, a lot of crop production is rain-dependent, given patchy irrigation coverage. A normal monsoon would therefore, be critical to assumptions that the agricultural sector will see a rebound.
Investors have already started looking at these areas. Despite the generally volatile trading patterns since the Budget, there is some momentum building up for businesses in this space. For example, investors have begun to target stocks such as UPL, Coromandel International, Bayer Crop Science, Monsanto, Rallis, Dhanuka Agritech and Insecticides India.
It’s early days yet. But, if the agri-play does work out, there should be stronger earnings growth for these companies over the next four to six quarters. There are some general comments one can make about these companies.
These are all well-established businesses and they have decent distribution and branding. These companies are all expensive in terms of high valuations, both from the historical perspective and in terms of expected EPS growth, But then, everything looks overvalued in this market.
What matters more is that these companies also have reasonably stable records in terms of profitability and operating margins. Input costs are likely to rise for fertiliser and insecticides, since petrochemicals are a key raw material and global crude oil prices are up. This might impact margins. But volume growth could be a balancing factor.
Most of these are medium-sized companies. Only UPL belongs to the top rung in terms of market capitalisation. Companies with lower market caps are prone to more volatility, but they can also yield better returns. If the rural play does come off, this may be a way of targeting higher returns.
Investors have already started looking at these areas. Despite the generally volatile trading patterns since the Budget, there is some momentum building up for businesses in this space