Mumbai: Prime Minister Narendra Modi’s incentives, a migrant worker exodus from cities and forecasts for a normal monsoon are increasing the appeal of staples stocks tied to rural India.
Analysts at IDFC Securities Ltd., Centrum Broking Ltd. and Crisil Ltd. are betting that shares of rural-focused consumer staples companies can outperform those serving cities as the nation begins to ease a nationwide lockdown. They are confident even as India heads for its first full-year economic contraction in more than four decades. The rural economy accounts for about 45% of gross domestic product.
Their reasons for being bullish include the government’s 1.5 trillion rupees ($20 billion) package to help farmers and fishermen, its steps to boost the income of farmers and the timely onset of critical rains. In addition, thousands of migrant workers are looking to work from their home towns.
The companies that “have a higher exposure to rural markets will definitely grow faster,” said Shirish Pardeshi, analyst at Centrum Broking. The “migrant laborers who have returned to their villages will start working and earning there and the government is giving doles to farmers, this money will come back to the staples category,” he added.
“Rural is a huge tailwind this year,” said Rohit Dokania, an analyst at IDFC Securities. “The lockdown wasn’t as severe in rural India as it was in big cities. So the farmers could harvest crops,” he added.
For Dokania and Centrum’s Pardeshi, shares in Hindustan Unilever Ltd., Dabur India Ltd. and Britannia Industries Ltd. stand to benefit the most from a rise in spending and income in rural India. The three stocks have outperformed the nation’s benchmark equity gauge and the S&P BSE Fast Moving Consumer Goods Index this year.
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Anuj Sethi, a director at Crisil Ltd. is also more optimistic about India’s villages than its towns. Rural India “will fare better than urban areas because of higher proportion of essential products consumed, government doles, eased restrictions on agricultural activities and likelihood of normal monsoon,” he wrote in a note.
Rural spending isn’t the only popular strategy focus. Analysts at IIFL securities Ltd. are rooting for underperformers to catch up with their stronger peers.
Sanjiv Bhasin, a strategist at IIFL Securities, favors ITC Ltd. and Godrej Consumer Products Ltd., both of which have underperformed the S&P BSE Fast Moving Consumer Goods Index this year. He said that the two stocks can surge 40% in next one year due to valuations and a change in their product mix.
“We’re seeing a lot of value in these two underperformers,” Bhasin said. “Their valuations are attractive. They’ve capitalized on masks, gloves and other necessities that emerged under this crisis. Their business composition has seen a change for the better in this pandemic,” he said.
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