MUMBAI: Benefiting from the rural India story seems to be the theme in times when the economy is stuck in a mire, and analysts see the silver lining in this year's good monsoon.
Agricultural growth has the potential to surprise positively as also crunch food inflation numbers, feel analysts.
The monsoon is likely to increase consumption and the companies that are linked with rural income can outperform those with the urban theme.
Besides, the spending by the government ahead of elections is expected to increase demand from the rural market.
"A number of companies in autos, consumers (staples/discretionary) and agri products have a high percentage of their revenue/profits coming from the rural sector. A good monsoon should boost rural consumption and be positive for these companies," said a UBS report.
As per the Indian Meteorological Bureau, India's monsoon rainfall in 2013 has been 5 per cent above normal, with 30 out of 36 sub-divisions reporting normal or excess rainfall, making this among the best monsoon in 15 years.
We give you a list of stocks identified by UBS and Deutsche Bank that will gain from the rural theme.
Following are UBS's high-conviction rural plays on the basis of the monsoon theme:
ITC: ITC remains our top pick in the consumer space as we believe cigarettes will deliver despite a weak macro. ITC's products have displayed resilient demand growth across cycles. ITC remains market leader in cigarettes, a category where they have brands that ladder across all price points; and which reach consumers through a wide distribution network. It is also a Most Preferred stock in our India Alpha Preferences.
Maruti: We believe Maruti remains the best way to play a potential recovery in the Indian auto sector given its strong product portfolio and distribution network. We expect Maruti to grow ahead of the industry driven by recovery in hatchback segment and new launches.
Dabur: The company's domestic business would continue to grow at double digit volume growth. We believe the rural reach improvement would benefit Dabur, as its mid-priced products appeal to a wider audience in the hinterland.
Colgate: With spend improvement expected in non-metro markets, we expect Colgate to gain from both volume and value improvement. Colgate is in a position to drive availability, upgrades, volumes and profitability.
Coromandel International: We believe Coromandel remains the best positioned to benefit from the growing agri-products market in India. Good monsoons should aid sharp ramp-up in its manufactured products sales leading to potential earnings surprise ahead. Valuations are attractive in both absolute terms as well as relative to last three-year history.
Emami: We expect Emami to benefit from their focus on pain management, healthcare and men's grooming; expansion in distribution network; new brand extensions and launches from end FY14 onwards and favourable correction in menthol prices leading to an improvement in gross margins.
The brokerage also advises investors to hedge their long positions in agri stocks by selling teo-wheelers, especially Hero MotoCorpBSE 0.13 % and urban discretionary names such as Jubilant Foodworks, Titan IndustriesBSE 0.35 % and United Breweries.
Here's a list of stocks from Deutsche Bank that'll benefit from the rural theme:
Maruti Suzuki India Ltd: 'Buy' for a target price of Rs 1550
Maruti Suzuki should be one of the key beneficiaries in auto sector as 30 per cent of sales respectively from rural India. India's largest carmaker aims to increase its distribution reach to 100,000 villages this year versus 45,000 last year.
Mahindra & Mahindra Ltd: 'Hold' for a target of Rs 950
Around 65 per cent of revenues and EBIT are derived from rural/semi-urban sales. Tractor growth is expected to recover in FY14 (+10% YoY) after a flat year in FY13.
Bharti Airtel Ltd: 'Buy' for a target of Rs 395
The Sunil Bharti Mittal-led Bharti Airtel gets its 43 per cent of subscribers from rural India. A good monsoon and crop would lead to higher disposable income in the hands of rural consumers.
ITC: 'Buy' for a target of Rs 385
ITC derives more than 50 per cent of its cigarette revenues from rural areas. The new thrust towards 64mm cigarettes will encourage conversion from "bidi's" to cigarettes. Every 1 per cent incremental volumes will result in 0.75 per cent higher earnings.
HDFC Bank Ltd: 'Buy' for a target of Rs 760
HDFC Bank has significantly expanded its rural presence over the past few years. More than 70 per cent of its branch additions over the past three years have been in semi-urban and rural areas. Buoyancy in rural markets should benefit it both on asset and liabilities side.
M&M Financial Services Ltd: 'Buy' for a target of Rs 290
Around 20% of asset under management (AUM) for MMFS are tractors which should directly benefit from strong agriculture. In addition there could be higher demand for cars and utility vehicles giving further opportunity for MMFS to grow.
Shriram Transport Finance Ltd: 'Buy' for a target of Rs 750
Strong agriculture harvest (on the back of good monsoons) could have a multiplier effect on rural economy. This should lead to higher demand for small CVs and Light CVs.
Grasim Ltd: 'Buy' for a target of Rs 3,335
Cement business of UltraTech is available at 35 per cent discount (assuming only a 5x exit P/E for the VSF business which generates RoE which is higher than CoE (cost of equity) even in the current down cycle in that business. For cement, which accounts for 80% of earnings, 40-50% of its business comes from the tier II and tier III markets.
Shree Cements Ltd: 'Buy' for a target price of Rs 4,625
Stock offers an attractive over 5 per cent FCF yield. Currently 40-50 per cent of its business comes from the tier II and tier III markets.
NHPC: 'Buy' for a target of Rs 24
We expect earnings momentum to propel from good monsoons in FY14. Higher reservoir levels not only helps in producing better generation volume, but also improve incentives in the form of higher water availability for the hydro power projects.
On an YTD basis, NHPC has delivered 240 bps improvements in availability and generation volumes are up 6% on consolidated basis. In terms of earnings sensitivity, 200 bps improvement in availability or 200 bps higher generation could lead to 2-3% higher EPS for each - and 5% for combined impact.