10 stocks most likely to make investors RICH!
From Dabur to HUL, here are 10 stocks with significant rural exposure in the auto, agri-chemical and fast moving consumer goods sectors, which should see an uptick in sales growth.
Illustration: Uttam Ghosh/Rediff.com
While proposals in the interim Budget should benefit multiple sectors, consumption-oriented themes both in rural and urban markets are stand to gain the most.
Assured income for small farmers, focus on rural roads and interest subvention, as well as ongoing schemes for electrification, housing and rural employment, are positives for rural consumption.
Tax rebate for individuals having income up to Rs 5 lakh and real estate tax breaks should help give a fillip to urban consumption.
Given the tilt towards spending both on the staple and discretionary segments, we have identified 10 stocks with significant rural exposure in the auto, agri-chemical and fast moving consumer goods sectors which should see an uptick in sales growth.
The company has the largest rural distribution among paint makers and earns 40-50 per cent from the rural market. Improving infrastructure activities, the government’s thrust on housing and rural income support create a favourable environment for the decorative paint leader to garner more volumes.
The volume accretion also stems from the slash in goods and services tax (GST) for the paint sector in July last year, which should help take away share from unorganised players, and from the recent capacity expansion (Mysuru and Visakhapatnam).
Further, with receding crude oil prices, though volatile, earnings outlook for the company looks positive.
The complete crop-solution provider with a strong presence across segments remains a beneficiary. Improved reservoir levels in south India and normal Northeast monsoon predictions lead to a favourable second half for agri-based companies.
First nine months saw revenues grow 22.1 per cent; operating profit grew 10.5 per cent year-on-year.
While recent price hikes would ease margin pressure, its global alliances are expected to reduce raw material availability issues and price volatility.
With increased direct subsidy transfer implementation, borrowings should come down, boosting profitability.
Capacity enhancement from 1,925,000 MTPA to 2,200,000 MTPA at its Kakinada plant should benefit further.
With over 45 per cent revenue share of the rural market, the rural consumption theme should aid earnings growth.
The management in a recent post-result call indicated a significant uptick rural growth.
This would also be aided by a strong distribution network, brand investments and fresh launches.
Analysts foresee the company’s strong volume traction (around 6.8 per cent annual growth on a three-year basis, higher than peers) to persist.
Overall, the stock, trading at 44 times FY20 earnings or 17 per cent discount to HUL, could move further upwards.
Market share gains are seen lately in key regions such as Haryana, Uttar Pradesh, Rajasthan, Assam, Bihar and Madhya Pradesh, which are also important agrarian belts.
Direct income support and interest subvention schemes are expected to result in incremental demand for tractors.
Analysts say this should reverse the earlier anticipated slowdown in Escorts’ FY20 revenues.
Escorts derives 17 per cent of its revenues from the construction equipment segment and 7 per cent from orders from the Railways.
Increased allocation towards infrastructure spends should keep the construction equipment segment buoyant, while the Railways segment is expected to grow by over 25 per cent in FY20.
The push to consumption by way of sops to farmers and middle-class families will boost consumer durable sales.
Havells - with a growing basket of durables such as pumps, coolers, geysers, purifiers, and leadership in fans segment - is likely to be a major beneficiary.
Its other segments such as cables, switch gears and lighting fixtures are already growing well, with increasing penetration in the rural sector.
The electrification programme and increasing housing requirement are growth drivers as they will benefit electrical as well as cooling products of the company.
The company derives over 60 per cent of its volumes from rural demands and holds leadership in the entry and commuter motorcycles segments.
Products such as CD-Dawn, Passion and Splendor are major brands and should help Hero MotoCorp’s volumes with additional money coming to the farm segment.
New launches in the scooters segment such as Destini (sales of which flattened after initial response) and re-launch of Maestro should propel volumes.
Analysts, however, maintain sub-10 per cent volume growth guidance in FY19 and say they will upgrade FY20 estimates once a visible demand pick up is seen.
After a strong 10 per cent volume growth in the December 2018 quarter amid rural business growing 1.3 times faster than urban, the healthy volume growth momentum is likely to continue.
This would mainly be on the back of continuation in faster rural growth as the FMCG major earns around 40 per cent of its revenues from the hinterland.
This is also expected to increase the sale of premium products along with new launches, which should aid margins.
Valuations, however, could cap upsides.
M&M Financial Services
Besides a strong parent backing (Mahindra & Mahindra), a huge 85-90 per cent of assets under management coming from rural pockets would augur well for the tractor financier, despite a challenging environment in the entire NBFC space.
Even in the December-2018 quarter, the company clocked 22-24 per cent year-on-year growth each in AUM and disbursement.
Branch expansion coupled with an expected improvement in rural cash flow is likely to keep growth momentum strong.
Mahindra & Mahindra
Additional income in the hands of farmers should lift Mahindra’s tractor sales, which have recently come under pressure due to farm sector stress.
M&M draws a little over half of its overall revenues from the rural market.
Even its core business - utility vehicles, led by its flagship model Bolero - gets over 40 per cent of its volumes from rural demand.
Entire tractor sales depend on the farm sector.
Pre-election sales are seen as an important trigger to lift the company’s overall FY19 volumes growth by over 10 per cent in FY19.
Hopes are high around the newly launched Marazzo and XUV300 to be launched in February 2019.
The company, which has a strong brand presence in India, should be a major beneficiary.
Its brands Sweep Power (non-selective Herbicide) and Shagun (wheat herbicide) have seen good traction.
While inconsistency in rainfall may have resulted in comparatively subdued first nine months of FY19, the company is expected to see improvement moving forward.
Besides, its international prospects remain firm with strong Latin American season ahead.
Further, the acquisition of Arysta is progressing well and should help drive synergy gains.
Analysts expect robust free cash flows of over $300million from FY20.
Interim Budget's impact on key sectors
While there is no direct measure, income support to 12 crore farmer households and blended tax reduction for 30 million taxpayers as well as higher allocation to the agriculture sector should help two-wheeler makers Hero MotoCorp, Bajaj Auto and TVS Motor.
Higher allocation to rural roads and infrastructure is expected to help commercial vehicle makers, while rescheduling of crop loans and interest subvention in addition to other rural measures should help tractor players.
A 12.6 per cent increase in allocation to road transport and highways, over 14 per cent hike in Railways capital expenditure, an increased metro and urban transport outlay and higher capital spend on defence services are positives for companies in infrastructure, road construction and defence projects such as L&T, Ashoka Buildcon, NCC and Sadbhav.
In addition to this, increased spending on housing and tax breaks for the realty sector and other infra measures should aid cement companies.
The Budget proposed to extend the single-window clearance system for the ease of shooting films to domestic filmmakers.
The option is currently available for foreign production houses only.
While this may not significantly reduce costs for the sector, it is believed that the ease of doing business should reduce the production time.
The move is seen as positive for PVR, Inox Leisure, and Balaji Telefilms.
These companies are also expected to gain from the introduction of anti-camcording provisions in the Cinematograph Act, which should reduce the menace of piracy and increase footfalls to movie screens.
Direct income support to farmers, higher subsidy for fertilisers and rural infrastructure projects are positives for companies such as Coromandel International, Chambal Fertiliser, and GSFC.
Interest subvention benefit of 2 per cent and an additional 3 per cent on timely loan repayment to a farmer pursuing animal husbandry and fisheries will benefit companies such as Godrej Agrovet and Avanti Feeds.
The sector did not have any direct implications from the interim Budget announcements.
However, a slew of measures announced for the real estate sector, particularly in the affordable housing segment, should give impetus to banks and housing finance companies.
Even finance companies with developer book exposure should gain from these initiatives in the medium term.
Support to farmers’ income is seen as positive for vehicle financers such as M&M Finance, Bajaj Finance and Shriram City Union.
For the fast moving consumer goods sector, the Budget gives more money in the hands of buyers.
Analysts say that in an environment of food disinflation, these measures would improve consumption sentiments.
Stocks such as Hindustan Unilever, Dabur, Marico, Emami and Colgate, which derive a chunk of their revenues from the rural market, are likely to see an impetus in demand with increased budgetary allocation towards farmers.
The Street is particularly happy that ITC hasn’t seen a jump in duty levies this budget, which gives the Street reasonable stability to forecast earnings.
Even among urban consumers, the income tax rebate hiked to Rs 500,000 is viewed as a boost to consumption.
Developers should benefit from a slew of measures, including tax exemption on notional rent on a second self-occupied house, increase in TDS threshold for deduction of tax from rent to Rs 240,000 and extension of the tax exemption on notional rent on unsold inventory to two years.
Affordable housing players stand to gain from 80-IBA benefit, which is extended for one year to housing projects approved till March 2020.
The sector also benefits from the rollover of capital gains under Section 54 from investment in one house to two houses for capital gains of up to Rs 2 crore.