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aspiration. The following stocks screen well on these criteria — Mahindra, Bajaj Jain Irrigation (JI IN) BUY 225.9 261
Auto, ITC, Dish TV, and Jain Irrigation. * Price target under review
Any authors named on this report are research analysts unless otherwise indicated.
See the important disclosures and analyst certifications on pages 27 to 31.
Contents
A first-hand glimpse: The purpose of this report is not to contextualise the rural This is boots-on-the-ground
growth story in a macroeconomic framework. It has been done before, and often. analysis …
Rather, we wanted to get a first-hand sense of the forces of growth chiselling away at
the economic landscape in rural India and shaping the future trajectory of growth for
the wider economy.
Seven analysts from our research team travelled to rural regions across the country to … anecdotal — but people count
better understand the rural story. They spoke to farmers, shop keepers, auto dealers, as much as statistics
farm labourers and general rural folk. What follows are key takeaways from the
sampled regions. We have tried to be as true as we could to the sentiment expressed
by the people we interviewed and have not tried to overlay them with our personal
views or couch them in economic statistics.
4. Wealth effect from rising land prices: As owners of a highly inelastic factor of Farmers like real wealth — land
production like land, farmers have benefited immensely from benevolent wealth and gold
effects of sharp recent increases in land prices across the country. Land (and
gold) is the preferred instrument of savings for most in rural India. Land prices get
a further leg up as farmers plough their savings back into land. Also, the inflow of
remittances from Indians living abroad is chasing land prices higher, especially in
Punjab and southern states of the country.
economic growth in the country and rising aggregate demand are providing fast-
expanding markets for food products and putting upward pressure on farm output
prices. Improving terms of trade for farmers imply rising incomes and consumption.
6. Farmers turning into entrepreneurs: Higher economic activity on an overall Rising incomes provide more
basis, rising incomes and benevolent wealth effects from the manifold increase in opportunities
land prices are providing seed capital to supplement farm incomes and diversify
into ancillary activities like dairy, retail, infrastructure (supplying sand, for example)
and transportation (renting tippers and tractors, for example). Rising incomes
mean that consumption in rural India is moving up the value chain, providing fresh
opportunities for new business expansion (eg, retailing).
A common theme that emerged across the regions we visited was the strength of Richer farmers can invest in
wages paid to daily farm labourers. Rising costs of living and labour shortages better equipment — tractor
have been mainly responsible for the sharp appreciation of the price of farm labour. makers look good here
We think that this combination of dearer and scarcer farm labour will lead to
increasing substitution of man with machine and mechanisation will continue to
rise at a quick pace in rural areas. Moreover, rising farming income and
supplemental income from non-farming ancillary activities have imparted farmers
with the ability to invest in the mechanisation of their farms. Consistent feedback
from tractor dealers was that there has been a significant rise in cash sales over
the past one year.
3. Buy aspiration
Barring regional differences in tastes, preferences, and consumption habits, we And very broadly, a whole class
found the following common threads that ran across the regions we visited: 1) an of consumers is being created
increasing willingness to experiment and explore new products; 2) need to keep
up appearances and purchase goods thought of as status symbols; 3) rising
consumerism and purchase of consumer durables; 4) amenability to up-trade, and;
5) rising brand awareness.
…and higher labour costs: In addition, the government also plans to increase
rural wages by 25% this year. This will lead to a sharp increase in cost of rural
labour, leading to further mechanisation at farms.
Increasing non-farm usage of tractors: The rural development policies are also
leading to alternative use of tractors in non farming activities. This is leading to
increased viability of smaller farmers owing a tractor. The company is the leading
tractor player in India with 40% market share in the tractor market and will be a big
beneficiary from this, in our view. We value the company at INR 892/share based
on Sum-of-the-Parts methodology.
Up-trading to cigarettes: We believe that with farm incomes rising, rural Cigarettes an affordable luxury;
consumers getting more affluent, and aspiration levels rising, one of the key this is an ‘aspirational’ good
beneficiaries would be ITC’s cigarette business. Remember, a large section of
consumers still smoke local hand-rolled ‘bidis’ and we see this section of
consumers increasingly moving away from bidis to cigarettes over the medium- to
longer-term. ITC would be a key beneficiary of consumer up-trading in cigarettes.
Upside to rural subscriber base: In our opinion, the DTH subscriber base can
potentially double in the next three years with bulk of the new subscribers coming
from the rural / semi-urban regions. Currently almost 45% of Dish TV's subscriber
base comes from rural India and this number can potentially go up to 60% in the
next three years. As the first player in this industry, we believe Dish TV is best-
placed to capitalise on the industry’s potential high-growth outlook. We have a
BUY rating on the stock with a DCF-based PT of INR64.
We think that the growth rate of the company’s MIS business can exceed 30%
over the next four to five years, much longer than earlier envisaged. With the
establishment of state level bodies over the next year to allocate central
government funds rather than the current district level model, the subsidy
disbursements should be faster and help reduce working capital requirements for
Jain and improve cashflows.
Rising mechanisation: With increasing shortage of labour, farmers will have to Mechanisation pays for itself
look towards mechanising their irrigation practices with MIS as the best alternative quite quickly
available, in our view. The constraint in terms of high capital cost will get eased
out as farmers’ incomes are increasing substantially while subsidies in the range
of 50-70% are available from the government. In our estimate, MIS systems have
a payback period of one-two years through increased yields, water and power
saving and hence are a very cost effective investment.
Re-rating potential: We believe that the earnings CAGR of Jain irrigation will be
40% between FY11-13F and ROEs will improve from 20.5% in FY11F to 25.3% in
FY12F (provided there is no equity raising). In such a situation, we believe, the
earnings multiple for the stock can re-rate. Since April 2006, the stock has traded
at an average multiple of 22x one year rolling forward earnings. We apply a
multiple of 20x to our one-year rolling forward EPS to arrive at our 12-month price
target of INR261/share.
Drilling down
Amritsar,
Punjab
(Nipun Prem)
Rai Bareilly/Barabanki, UP
(Kapil Singh)
Barasat, West
Bengal
Navsari, Gujarat (Anup
(Aatash Shah) Sudhendranath)
Nasik, Maharashtra
(Prabhat Awasthi)
Maddur, Karnataka
(Anup Sudhendranath)
Cochin, Kerala
(Pinku Pappan)
Nagercoil, Kerala
(Harish Venkateswaran)
Source: Nomura research
Another important factor driving the rural theme in the region is the wealth effect
from rising land prices and remittances from abroad. Agricultural surpluses have
also been used to consolidate land holdings rather that being invested in other
investment avenues like equities. Bank deposits are mainly used for working
capital needs. Status is a function of size of land holdings.
2. Rai Bareilly and Barabanki, Uttar Pradesh, North central India (Kapil
Singh)
The principal crops in the area are rice, wheat, pulses and cash crops like Rising MSPs, greater availability
sugarcane, vegetables and Eucalyptus. Over the past few years farmers have of finance and improved
reaped rich dividends from increased minimum support prices (MSPs) for crops. infrastructure and information
They have also benefited from improved road connectivity to Lucknow city, which
has led to sharp appreciation in land prices. With incomes growing from farming
as well as non-farming activities, the people we met indicated to prospects of
another prosperous year.
Use of farm equipment seems limited, as paddy crop has traditionally relied on
rain water. As far as sprinklers are concerned, most farmers seemed to be using
equipment from local manufacturers. Average size of land holding is about three-
four acres in the area. There are only a few farmers who own eight-10 acres or
more, and they are leasing out the land to smaller farmers. Size of the land
holdings has been getting smaller over the years due to its division among the
family.
4. Navsari, Gujarat, Western India (Aatash Shah) Remittances from abroad are
fuelling land price appreciation
Navsari is located in southern Gujarat which has historically been a rich rural belt
with good water availability and fertile soil along with proximity to large industrial
centres. The main crops in the area are sugarcane, rice, mango, sapodilla and
vegetables. Navsari has benefited due to its proximity to Surat and also from the
fact that a large number of people have migrated abroad over the past several
decades and are remitting their earnings. Farmers have benefited a lot from
increased prices of sugarcane and also by appreciation in prices of their land
holdings. The increasing farming income and/or the one-time increase in
prosperity from sale of land has led to increased consumerism and a movement
towards semi-urbanisation.
scale. Spices and tea cultivation happens on a larger scale, albeit with corporate
participation.
Overall incomes are increasing, which is visible in consumption of discretionary High literacy levels can cause
items like cars and white goods. Kerala, because of its highly literate population, is further labour shortages
a test-bed for new product testing and feedback. Brand awareness is quite high
and people are willing to try out new products and brands.
Higher land prices and shortages: However, many farmers are surrendering
land to real estate companies due to the sharp run-up in land prices and non-
availability of labour. Kerala’s high population density has resulted in scarcity of
land, so much so that the state government has restricted farm land from being
used for other non-agricultural purposes. Famers complain that incentives for
farming have come down as farm workers have emigrated in search of stable
salaried jobs. Moreover, highly literacy levels in the state have added to farm
labour shortages.
Labour shortages: The general feedback was that shortage of labour is the
biggest problem for farming today. The younger generation and children of
farmers are not interested in farming. The shortage of farm labour has in turn
resulted in the existing workforce demanding higher wages. Many of them want
fixed pay instead of daily wages. Cheaper labour from north India is now
substituting local labour. However, as the labour required for farms is skilled in
nature, it is still difficult to replace.
Land holdings: Average size of land holding is about three-four acres in the area.
There are only a few farmers who own eight-10 acres or more, and they are
leasing out land to smaller farmers. Size of the land holdings has been getting
smaller over the years due to its division among the family.
Higher crop and land prices: Sugarcane price has gone up from INR40-50 per
quintal in 2006 to INR200 per quintal in 2010. The price of land has gone up much
faster for land close to roads that are well connected to the city.
Increasing tractor usage: People now prefer to use tractors as bullocks are
difficult to maintain and the time available to till the land this way can be wanting.
Tractors have become much more viable for smaller farmers now. A tractor can be
rented at INR200/hr for some 10 hours per day. It costs INR80/hr to run the tractor.
Other expenses including drivers’ salary and food cost of some INR200/day
yielding a profit of nearly 1,000/day. Thus if the tractor can be rented for 20 days in
a month, a farmer can earn 10,000 per month even after paying EMI of some
INR10,000 per month. Tractor usage in non-farm applications is as high as 50%
compared to 20% two years back.
Irrigation: Irrigation is done largely by canals and rain. Most farmers are not
aware of micro irrigation. They buy pipes by weight and lay them in the fields.
Farmers are not aware of any brands of urea or pesticide. They use whatever is
available.
Land price appreciation: The increase in crop prices has translated into a rise in
land prices as well. The demand for agricultural land has far outstripped the supply.
For example, one acre of rubber plantation costs around INR2mn now vs around
INR1mn, two years back.
Labour shortages: Inadequate availability of labour is the key issue in farming.
There are not enough labour hands to help in farming. Hence daily wages for the
labourers has shot up to INR300/day from about INR100/day two-three years ago.
According to farmers, labour shortage is mainly due to people moving to urban
areas or abroad for employment.
Higher land prices: Price of land closer to the highway and the town is about
INR10-15mn/acre while price of land in the interiors ranges from INR2.5-5mn/acre.
Land prices have moved up about 3-4x over the past five years.
The yield on buying land today and growing sugarcane on it, in the best case
would be about 6%. Farmers, though, did not seem very eager to sell their land
and did so only because they either needed the cash or did not have descendants
interested in farming. Some farmers are selling their land closer to town and
highway and buying larger land parcels in the interior while saving some money.
Some farmers are turning entrepreneurs with the money they collect from the land
sale.
Labour shortages and mechanization: Farm labour is in short supply though the
reason is diversion towards industries rather than NREGA. Labour costs about
INR50/day, up from INR30/day two-three years back but the labourers only work
4-5 hours in the day. This has resulted in increased mechanisation in the form of
tractor and harvester usage along with drip irrigation in spite of enough water
availability. People now prefer to use tractors as bullocks are difficult to maintain
and can not plough very quickly, which is sometimes needed.
Non-agricultural use of tractors: Tractors are being bought not just for usage in Tractors are also used to truck
farming but also to rent out for haulage purposes. There are a number of quarries heavy materials
in the area which require these tractors to transport the stone while infrastructure
projects in the region also require these tractors. A farmer renting out his tractor
for such purposes stands to make INR15,000/month after costs, making a tractor
purchase much more viable. At the same time, there have been issues in terms of
the farmers getting their payments on time. Some 60% of farmers are using
tractors currently.
Irrigation: Irrigation is done by canal and ground water. There is high awareness
of drip irrigation but not widespread usage given enough water availability.
Based on feedback from a wheat farmer, the following are the expenses from sowing
to harvesting associated with one acre of wheat:
The average land holding per farmer depends upon the region, but based on our
discussions we can assume an average holding of 5-7 acres. So pure farming
income for a typical farmer from the two crops (kharif and rabi) would be about
INR210,000 (US$4,595) per year, not including income from growing vegetables
and other supplemental non-farm income
Incomes have multiplied in pace with revenue and costs, providing seed The more money in farming, the
capital for expansion into non-agri activities: The general feedback from more room to branch out
farmers was that although crop prices have risen recently on the back of higher
MSPs (minimum support prices, set by the government), margins have remained
the same because input cost (labour, seeds, fertilizer, etc), inflation has kept up
with output prices. However, this means that income from farming activity has
increased at the same rate as output prices and input costs. This increase in
incomes has provided farmers with seed capital to expand into supplemental farm
activities like dairy and non-farm activities like construction and transportation.
Higher labour costs, but little impact from NREGA: The general feedback on
labour costs was that labour rates have risen commensurately with the increase in
cost of living. Most farmers we spoke to were not aware of NREGA. We suspect
that this is because NREGA wage rates are not binding at current levels as the
daily wage rates for farm labour exceeds NREGA wages, with temporary labour
wages at INR200/day. Temporary migrant labour (mostly from UP and Bihar) and
local (Punjab) daily wage rates have converged recently to INR200 (US$4.37)/day
from INR80/day five years ago, a 20% CAGR increase. Permanent labour salaries
have increased from INR10,000-15,000 five years ago to INR20,000-25,000 now,
about 10-15% CAGR. Development taking place in UP and Bihar along with
NREGA is putting pressure on availability of migrant labour, although the farmers
we spoke to did not feel that availability was a serious issue.
Land prices have shot up: Remittances from NRIs (Non-resident Indians) abroad
and increasing pace of residential and commercial construction activity in the
region are putting significant upward pressure on land prices. A wealthy farmer —
land holdings of 45 acres, in addition to running a transportation business on the
side — we spoke to informed us that his land is attracting a large premium amount
of INR15mn/acre. His own threshold price should he sell was INR20mn/acre. This
compares with a price of INR0.5-0.7mn/acre about five years ago. The enormous
appreciation in the price of this particular tract of land, we were told, was because
of a residential colony coming up adjacently. Also, large inflows of NRI money are
also fuelling the runaway appreciation of land holdings in the region and state.
Irrigation and drought: Even though Punjab is better irrigated compared to other
states in India, tube-wells are the main source of water for most farmers (80%
tube-wells, 20% canals) in the region. During drought, canals dry up because
water is rationed from upstream. Also, hydro power is a main source of power in
the state and electricity generation suffers in a rain-deficit year, impeding the use
of pump sets and forcing farmers to use diesel-based generators to draw water.
This raises expenses in a year in which revenue has already been hit because of
low agricultural yield. The farmers we spoke to were not aware of drip irrigation.
So have land prices: Land prices are up 4x in the past three-four years in general
and have shot up even more closer to the city, led primarily by the real estate
sector. Land prices have largely followed improved farm economics and therefore
may not come down. Closer to the city, farmers sell their land, reap a profit and
move inwards to buy land at cheaper prices. The combined impact is a massive
wealth effect through major profit increase and quadrupling of land prices.
Clearly, considering the much higher productivity of tractors, they make better Unlike bullocks, tractors can be a
economic sense. It was also pointed out that bullocks need feeding even if they cash cow
are not being used. Tractors are also used 30-40% of the time in haulage work
which is available more frequently on account of public works. While tractors vs
bullocks looks like no contest, the buying decision does depend on capital
availability and land holdings. Given that cashflows have seen a significant jump,
the capital cost bridge has become easy to cross. According to the tractor dealer,
35% of tractors are being bought for cash against 10% earlier.
Exhibit 5. Combine at work near Amritsar, Punjab Exhibit 6. Tractors hauling sand in Amritsar, Punjab
Subsidies and crop loans: Subsidies on farm equipment like tractors are
available, though it takes time and is a lengthy process. However, most famers opt
for subsidies.
Most farmers have only small fields so they are disadvantaged when it comes to NREGA wage rates are not always
crop loans which are limited to the value of land. Most of the time, farmers do not binding
avail themselves of these loans due to the lengthy process involved and the
meagre loans they can tap.
Farm waivers: There has been negligible impact from farm waivers. Most farmers
who could get their loans waived had already paid back most of their loans and
were hence ineligible. Farm loan waivers have mostly benefitted only the large
scale farmers with political connections.
MSP increases: The hikes in MSPs (Minimum Support Price) have had a big
impact on incomes. Farmers especially benefited from high sugarcane prices last
year, which sold for as much as INR200/tonne in FY10.
Public works: Rural infrastructure development activity has led to job creation
and opportunity for smaller farmers to rent out their tractors.
Limited NREGA impact: NREGA has not had a big effect on labour availability or
wages. This is because the wages under the scheme are only around INR
100/day. Any healthy labourer can get 3-4x that and hence would not opt for the
scheme. So only the older labourers who have difficulty working have signed up
for this.
MSP increases: There are no MSPs for the crops grown here except for rice and
the farmers directly negotiate the price with the sugar mills or in the markets.
Subsidy on tractors: There is a subsidy of INR45,000 for buying tractors from the
government on tractors below 35HP but these tractors are not large sellers. The
approval process is time-consuming.
Kisan credit card: Kisan (farmer) credit cards have been given to few farmers
which has helped them purchase inputs through short-term credit.
Minimal NREGA impact: Most farmers we spoke to were not aware of NREGA;
others said it was not an issue. We suspect that this is because NREGA wage
rates are not binding at current levels as the daily wage rates for farm labour
exceeds NREGA wages, with temporary labour wages at about INR200/day.
Tractor sales have received a boost: Tractor sales are a key beneficiary of
benevolent government schemes as: 1) there is a benefit of using tractors in
construction works, and; 2) labour shortages created on account of the
government programmes also drive up tractor usage. The government has also
pushed higher the usage of internet and has schemes for sending SMSs on
“mandi” prices on a monthly subscription basis. Easy loan availability is another
by-product of government policies.
Exhibit 7. Unorganised sand mining in Mandia, Exhibit 8. Dish TV antenna on tiled roof in Maddur,
Karnataka Karnataka
Tractor sales have increased about 30% y-y in 2010, although dealers say they
expect it to come down this year with the change in government. PDS price
increase and thrust by current government on farming has led to the surge in
tractor sales.
Cash purchases as percentage of sales: Auto dealers say that about 15-20% of
sales are paid out fully in cash. They also add that many customers opt for auto
loans, even though they have the resources to pay cash in full, in order to avoid
income tax scrutiny. For tractors sales, the percentage of full cash sales is
negligible.
2. Maddur and Mandya, Karnataka, Southern India NBFCs are often preferred to PSU
banks because of quicker loan
Loans – NBFCs preferred to PSU banks: Mahindra Finance units in Bangalore
approvals, lesser documentation
and Mysore put together do about 1000-1100 disbursements per month – and convenience
Bangalore 800, Mysore (includes Maddur and Mandya) 200 and Kolar (northern
Bangalore) 100. In Mysore, this relates mainly to tractors, but in Bangalore they
also do passenger car financing and have tie ups with Hyundai, Maruti, CAT, JCB
etc. Of the overall portfolio, tractors are about 40%, 3 wheelers and pickups are
about 30%, small cars about 25% and 2 wheelers about 5%.
The typical approval time for loans is about 2-3 days vs banks which take about
3-4 weeks or so. Feedback received elsewhere seemed to suggest that this is one
of the main reasons that customers prefer NBFCs to banks.
Availability is limited by tight supply constraints: Feedback suggested that Auto sales are hitting supply
availability of vehicles is a significant issue across the three dealers in the region. constraints
Most popular models where demand has consistently been strong over the last 6
months are Bolero, Scorpio, Xylo and Logan. Maximo and pickup trucks are the
popular commercial vehicles. Feedback suggested that demand for these vehicles
put together was about 20-25 units per month, but severe supply constraints have
meant that delivery is limited to only 6-7 per month. This situation has been there
for 3 months now and dealers seemed to be concerned that this has not corrected
Loan rates: Banks are offering crop loans at 6-7%. The amount of loans given is
INR20,000 per acre. Some times people divert these funds for other uses. The
IRR on tractor loans is about 22% and that for cars ranges between 14-16%.
Revenue split: For loans disbursed by Mahindra Finance, tractors form 13% of
revenue, UVs 50%, non-Mahindra autos 24%, CVs 11% and the rest 2%.
5. Mathias Nagar, Nagercoil, Trivandrum, Kerala, Southern India Full cash down purchases are
rising along with incomes
Farmers prefer NBFCs to PSU banks: There is not much support from the
government for farm-related financing. Farmers take loans from banks/NBFCs to
finance farming equipment. There are society loans (government-backed) for
agriculture at much lower rates but these are very difficult to obtain as they require
a lot of documentation. On the other hand, NBFCs provide financing quickly with
minimal documentation. They also have doorstep collection of payments every
month which saves the farmers trouble of travelling to the branches to pay their
EMIs. Hence, farmers prefer financing from NBFCs.
Cash sales increasing: As per the Mahindra Finance branch head and the auto
dealers we spoke to, people in Navsari no longer require financing to buy two
wheelers. Some 20% of all vehicles sold in Navsari are through full equity. Loans
are for a period of 5 years and lower.
Loan rates: Crop loans are available from banks and farmers who avail of these
often use them for purposes other than farming. Crop loan amounts are
INR20,000/acre at 6%. IRRs on tractor loans are 22% and for cars ranges between
14-16%. SBI, BoB and Kotak are the most aggressive lenders in this segment.
Loan portfolio: The composition of their loan portfolio: 90% autos, 10% non-
autos. Within autos: 40% cars, 20% tractors, 20% UVs, 20% CVs.
Loan rates: Interest rates (minimum loan amount INR50,000) across their product
portfolio: Tractors: 24% floating, 16.6% flat; prime customers pay lower rate. Autos:
rates have increased from the bottom; 16.5%; 14% (Special urban scheme); 10%
(1 lakh loan for 1 year). The 0% interest rate scheme is offered only to a few select
customers. The company earns servicing fees and subventions and hence has an
incentive to push 0% interest rate loans onto customers who would otherwise
have paid full cash down. No loans are given for farming activities (combines,
fertilizers, seeds, reapers etc). The company discourages financing of high-end luxury
cars because of low resale value.
NBFC edge over PSU banks: PSU banks require much stricter documentation NBFCs are more nimble
and also pledge land, something NBFCs don’t do. NBFCs don’t extend
government schemes, something PSU banks do. NBFCs approve loans within 2
days, PSU banks take at least one month in disbursing the loan.
Cash as % of sales: On an overall basis, 40% of sales are full cash payment,
60% is financed. Of the ones who get financed, company policy is an 85% LTV
ratio.
Use of tractors: 75% for farming (ploughing), 25% non-farming (moving bricks,
sand, cattle)
Loan rates: We were told that tractor loans from private NBFCs come at rates
between 14-20%, car loans at 14%, refinanced loan at 18-22%. Crop loans from
PSU banks are available at 6%. These are available against land holdings with
amount per acre being fixed. Farmers tend to use these loans for purposes other
than farming at times given the cheap rate of financing.
Exhibit 9. Food Corporation of India grain storage Exhibit 10. Drip irrigation facility in Nashik,
facility near Amritsar, Punjab Maharashtra
Increase in brand awareness: Customers are willing to try out new products Increasing willingness to
before making the final decision. Also, novelty factor sometimes scores over experiment and explore new
practical factors, as evidenced by surge in sales of newer models of cars like Beat products
and Figo.
Up-trading: Many customers are opting to exchange 2-wheelers for cars. There is
evidence of up-trading within cars too – exchange offers for a new car in lieu of an
older one are much in demand.
Real estate: In terms of vehicles of investment, real estate is the most preferred
asset class for most in the area.
Consumerism on the rise: As people have become richer they are buying 4-
wheelers as a status symbol. About 10% people buy products outright with cash.
According to dealers, some people take loans to avoid suspicion of having too
much cash with them. Retail stores like Hariyali and Vishal Megamart have set up
their shops and people are beginning to explore them. People are buying ever more
mobiles and consumer durables. However, electronic goods and Dish TV penetration is
still low as electricity availability is erratic.
Strong auto sales: Growth in categories such as tractors and automobiles has been in
excess of 30%. It is likely to continue at the same rate for many more months
according to dealers due to strong growth in incomes and good crop prospects from
this last year’s rains. New auto dealerships are also penetrating slowly and some very
rich people are experimenting with newer brands. By and large though they still prefer
tried and tested brands.
Increasing cash purchases: Close to 30% of car purchases are outright with no Rising brand awareness and
financing. Even in cases where financing is involved, the loan is about 50% of the amenability to up-trade
value. For commercial vehicles, financing is usually higher at about 80% of the
value. People either take auto loans from banks/NBFCs or gold loans to finance
their car purchases.
Strong brand awareness: While purchasing cars, people are very aware of
brands and their relative standing in public perception. According to the vehicle
dealers we met, people are buying cars more as a status symbol than anything
else. People who come in to buy lower-end models like Wagon R are easily
convinced to upgrade to higher-end models like Swift. Premium segment car sales
have also increased substantially. Brands like Skoda, Mercedes-Benz have seen
a significant uptick in sales in the last one year. Since there are no local dealers
for such cars, people travel to close-by cities to buy such cars.
Preference for small-scale retail: Retail stores like Reliance have been set up in
the region but are not too popular with the local people who still prefer the mom-and-
pop shops because of credit availability. Also there is good amount of competition from
the local farmer co-operative shops.
acres of land and owned one tractor (Mahindra 605) and one motor cycle (Hero
Honda).
Brand awareness stronger among the rich: We found that awareness of brands More diversified sources of
is a function of the size of land holdings, typically. The smaller farmers we spoke income and wealth effects from
to were neither picky nor aware of brands. The richer farmers were pretty clued rising land prices are
into latest consumer trends and owned the array of aspirational consumer underpinning changes in
consumption habits
durables – plasma TVs, luxury cars, washing machines, air conditioners, etc.
Wealth effect of higher land prices: Another factor driving rural consumption is
the wealth effect from rising land prices. A farmer told us that the price of his land
had increased from INR0.3-0.4mn five years ago to INR2mn now, more than a
40% CAGR. The price appreciation has been much higher for land close to a road
or area identified for residential or commercial development. Development of rural
roads has boosted trade and movement of goods between villages and cities
close by. There are also positive spill-over affects of development in neighbouring
states. A relatively well-off farmer, we learnt, has invested in tippers which are
being used to move road construction materials for a dam being built in
neighbouring state of Himachal Pradesh. Farmers with land holdings close to
roads have been particular beneficiaries of rising land prices, the wealth-effect
from which has spurred consumption further. There has been a large and steady
inflow of NRI remittances and this money has primarily been used to bid land
prices higher.
Land the primary reservoir of savings: Agricultural surpluses have also been
used to consolidate land holdings rather that being invested in other investment
classes like equities. Bank deposits are mainly used for working capital needs.
Earnings reinvested in land: We also noted that the farmers talked about
reinvesting a significant portion of their earnings back into land.
children, who are better-educated and are influenced by advertising, are very particular
about their brand preferences. They prefer to buy brands endorsed by their favourite
actors and actresses.
Mobile phones have had a significant positive impact on the daily lives of farmers and
fishermen. Most farmers have 3-4 mobiles in their houses which they share with their
labourers. For them, communication is vital between them and their labourers, to get
information about produce prices in other regions.
This is a very profitable business. One truck load is worth INR16,000 in revenues and
excluding costs (INR6,000 for materials, INR4,000 for labourers, and INR4,000 as
bribe to local authorities to run the operation), he makes a net profit of INR2,000 per
truck load. He does about 25 truck loads in a month and has a net income of
INR50,000 per month from this operation.
He has been investing back into this business over the last few years and now owns
two of the JCB machines that he uses. One of them is fully paid for and he has an
outstanding loan on the other machine with an EMI of INR46,000, which he is able to
service using money he earns from his farm income as well as the bricks business.
Feedback from farmer: We met Mr Somanna, who has about 3.5 acres of land on
which he grows paddy and ragi. He has over the years diversified into manufacture of
raw silk. There is a big silk industry in the area and he supplies to the end users. He is
aware of the loans that the government provides to start a silk manufacturing unit, but
has opted to not take any loans because of the red tape involved in getting a
government loan approved. He produces about 200kg of raw silk, which gives him a
profit of INR25,000.
Also like many others in the area, this family grows most of the produce it needs. Only
a few items are sourced from the market such as FMCG products.
The government provides funding of about 60% to set up a silk worm house. It costs
about INR0.1mn to setup a house with the silk worms. However, he has opted to not
take the government funding.
Feedback from farmer: We met with Mr Ramakant Das, who runs a variety of
businesses and lives in a village which is about 80km from Barasat. He owns about 3
acres of land. He makes about INR10,000 per month from cultivating vegetables,
INR10,000-15,000 per month from cultivating paddy and INR15,000 per month from
renting out his vehicle (a Maruti Omni). He has recently bought an Eicher truck and
has a loan amount of INR 0.7mn and an EMI of INR16,500.
He said the infrastructure in his village has improved dramatically over the last five to
seven years as new roads have been built under the Pradhan Mantri Gram Sadak
Yojna (centre-sponsored rural roads scheme). There are about 845 houses in the
village, which have all been rebuilt or revamped over the last 5 years.
Most homes in the village have a cable connection. Lifebuoy, Lux, Parle-G, Wheel and
Maggi seem to be the popular FMCG products.
Risks to our call are: 1) increased working capital intensity, leading to reduced
cashflows and margins; 2) reduction in government support for micro irrigation systems
(MIS) and government spending on infrastructure projects; 3) increased competitive
intensity leading to lower margins or market share for JISL; 4) volatile raw material
prices, which could impact margins; 5) further depreciation of the rupee against the US
dollar, which could increase forex losses; and 6) acquired companies not achieving
expected profitability.
Previous Rating
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