With an eye on rural recovery picking up pace, Bank of America Securities (BofA) has moved staples to overweight from the underweight rating. “Our analysis suggests robust Rabi production, normal monsoons likely driving good Kharif yields, coupled with elevated agriculture prices (above MSP in most cases) and government subsidies curtailing cost pressures, could mean 10-12% YoY rise in net farm incomes,” BofA said in a report. The global brokerage and research firm has cut the Nifty target by 1,000 points to 16,000 on faster than earlier expected monetary policy tightening and inflation worries.
Banking on rural India
India’s rural population is a massive driving force with nearly two-thirds of India’s population residing in rural areas and more than 40% of India’s workforce is employed in agriculture/related activities, which contribute about 16% to India’s GVA, according to BofA. “While robust rural demand provided strong support to the overall economy in the lockdown impacted phase of the pandemic, rural sentiment turned weak in the second phase on rising inflationary pressures,” analysts noted.
However, now rural demand could be nearing the bottom and recovery could be on the cards in the next 1-2 quarters. Good rabi income from wheat, pulses and oilseeds, and the expectation of a normal monsoon for Kharif crops could bolster this outlook.
Even on the non-agriculture side of rural India, BofA said that Government’s spending on rural infra schemes remains high, which will aid the outlook. Analysts noted that attendance in the MGNREGA has dropped below the pre-pandemic average, likely indicating better availability of alternate job opportunities. “Our channel checks with auto dealers, FMCG distributors & sales/ supply chain managers, also point to an initial uptick in rural demand, along with expectations of turnaround by next 1-2 quarters,” they said.
What to trade?
Staples have been turned to overweight by BofA. “Staples companies have significant rural exposure (up to 40%) and their having stepped up rural distribution post-pandemic (no of distributors up 42% vs FY20) could serve as a catalyst for accelerated gains on likely rural turnaround,” they said. “We see cement (40% rural exposure) and rural-focused NBFCs are other stocks exposed to the theme. Ultratech Cement and Mahindra & Mahindra Finance Services are our analysts’ key Buys in this space,” BofA added. Further, tractor and two-wheeler demand is also seen to benefit from the rural trend.
Mahindra & Mahindra has a ‘Buy’ rating from BofA with a price objective of Rs 1,050 per share. Mahindra & Mahindra Financial Services has a ‘Buy’ rating with a price objective of Rs 206 per share, and Ultratech Cement too has a ‘Buy’ tag with Rs 7,800 per share as the price objective.
Nifty target cut
BofA has also cut the target for Nifty by 1,000 points to 16,000 from 17,000 earlier. The cut comes on the back of faster than expected rate hikes and heightened inflation. “Any easing of currently volatile crude prices, a turnaround in FII flows & bottoming of INR could be an upside risk in our view, while global Inflation prints coming ahead of estimates & resulting in faster than anticipated rate hikes is the key downside risk,” analysts said. In the bear case scenario, analysts see Nifty’s valuation multiple shrinking to its LTA of 15.8x, resulting in the index falling to 13,700.