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Conversation with Mr Benjamin Mathew, MART on trends in rural India
In an insightful conversation, Benjamin Mathew of MART shared important factors which impact rural consumption. He says, (1) lower remittances to rural India from urban India led by migration of labour will cause temporary consumption slowdown, (2) out of total income of farmers, agri income (30%) will be better considering a strong rabi season 2019-20 but service income (50%) will be hurt and will also impact overall consumption in rural India and (3) the key to drive consumption in rural regions is increasing allocations to rural welfare/employment schemes like NREGA and PM Kisan. Read on for the conversation in Q&A format. We continue to like HUL, Dabur as rural plays.
* Whether the incomes of consumers in rural areas are getting impacted now? The consumers in rural regions generate c.30% income from agriculture, c.18% from industry and c.50% from services. While the agri income may see some growth, income from services is impacted. At a consolidated level, there will be some (transitory) impact on incomes of rural consumers.
* Can migration of labour hurt the incomes and consumption? Labour has migrated back to rural regions. Earlier these laborers used to remit some money to their family members in rural regions which used to drive consumption in those areas. However, with the migrant labor moving to rural areas, income as well as consumption in rural regions will be hurt.
* Is there any slowdown in consumption? As of now there is panic buying by consumers in rural regions and hence, it may appear as higher consumption but the goods are just moving from retail outlets to the houses of consumers (pantry stocking). The real consumption pattern will be known once the replenishment happens in the stores. Also consumption was growing at mid-single digit and lower income levels may hurt this ‘growth’. There may not be reduction in consumption.
* Is the demand for tractors and two-wheelers impacted? The NBFC crisis has hurt the investments by rural consumers. Tractor sales may not grow without the support of funding to the farmers.
* Can partnerships between consumer companies and farmers work? The partnerships between consumer companies and farmers are really working well. Companies selling spices (Goldiee masala) and milk companies like Amul are helping the farmers generate higher as well as steady income levels. Other such partnerships can move up income and consumption in rural regions.
* What is needed to drive consumption growth in rural areas? Higher allocation to schemes targeted at farmers / rural laborers such as PM Kisan and NREGA income will increase the disposable surplus in the hands of consumers.
* Valuation: We value stocks on DCF (WACC and TG ranging from 10-13%, 3-6% respectively) except Godrej Consumer which we value on SoTP basis. Key upside risk is better-than-expected gross margins due to correction in input prices. Key downside risk is unexpected irrational competition due to deceleration in general consumption demand.
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