15 stocks that stand to gain from higher rural spending by government

The rural India theme is likely to be in vogue on Dalal Street in the near future as the central government is expected to pay more attention to the rural economy and agriculture in the Union Budget on February 1. ET has compiled a list of stocks that brokerages expect to benefit from higher rural spending:

IIFL
HATSUN AGRO
CMP: Rs 842 Target Price : Rs 1,054

The company is expanding procurement infrastructure to boost revenues and backward integration to improve margins. It commands 2x valuation multiple compared to its peers owing to better procurement network (100 per cent direct milk sourcing; 60-90 per cent for peers), shorter cash conversion cycle (70 per cent; 30-40 per cent for peers) and 100 per cent B2C sales (30-60 per cent for peers). We estimate PAT CAGR of 34 per cent over FY17-20E.
JYOTHY LABORATORIES
CMP: Rs 392 Target Price: Rs 462

Jyothi’s Henkel acquisition in 2011 fuelled its initial leg of growth and post lapse of Henkel’s option (Oct-17), JLL is now ready for the next phase. We believe slew of measures would drive JLL’s top-line and profi tability CAGR at 13.1 per cent and 28.3 per cent over FY18-20E respectively. This will lead to contraction in discount vs. peers, and hence, rerating of the stock.

VARUN BEVERAGES
CMP: Rs 516 Target Price: Rs 670

VBL is at a sweet spot to explore huge growth potential owing to low per capita consumption of soft drinks in India. Low capex requirement (with capacity already in place), attractive acquisition strategy (6x EV/EBITDA) and preferred franchisee stature of PepsiCo, augurs well with VBL’s growth. We are factoring 33.3 per cent PAT CAGR over CY16-19E owing to healthy revenue trajectory, lower interest outgo and no major increment in depreciation.

Motilal Oswal
DABUR INDIA
CMP: Rs 350 Target Price : Rs 410

Nearly 50 per cent of Dabur’s domestic sales comes from rural India – the highest proportion among FMCG companies – making it an ideal play on rural revival. For 2QFY18 rural sales grew by 11 per cent, faster than its growth in urban sales at 10 per cent. Worries on both the wholesale channel due to GST implementation and rural sales are receding faster than expected.

MAHINDRA & MAHINDRA
CMP: Rs 1555 Target Price: Rs 1,658

MM has the highest dependence on the rural market among key auto OEMs, making it the best bet on rural market recovery due to good consecutive monsoons and loan waivers across states. The government’s target to double farm income in fi ve years will not only help in reducing volatility in tractors, but also catalyze penetration of implements.

MANPASAND BEVERAGES
CMP: Rs 437 Target Price: Rs 492

MANB is primarily focused on the rural market. This is evident in its competitively priced small SKUs and continuously-expanding rural distribution network. In the last one year its rural outlets have doubled to 5 lakh. Moreover, with access to 4.5m Parle outlets pan-India, MANB is in a sweet spot to penetrate the rural market across geographies.

ICICI Direct
EPC INDUSTRIES
CMP: Rs 165 Target Price: Rs 230

Micro-irrigation is an effi cient irrigation technique and is core to the government’s vision of doubling farm income. EPC Industrie is a leading micro-irrigation player with a market share in excess of 5 per cent. It belongs to M&M group and has a debt free balance sheet. We value EPC at 2.2x MCap/sales on FY19E sales.

SWARAJ ENGINES
CMP: Rs 2,020 Target Price: Rs 2,570

Swaraj Engines is a leading manufacturer of engines supplying to Swaraj brand of tractor owned by M&M. It has a capital effi cient business model with steady margin profi le. It is a good proxy on domestic tractor industry which is on track to clock sales of 6.5 lakh units (12 per cent YoY growth) in FY18E.

HERO MOTOCORP
CMP: Rs 3,700 Target Price: Rs 4,275

Hero Motocorp, is a play on rural theme, given that it is expected to register average volume growth of 9 per cent over FY17-19E, largely driven by demand in the lower 2-W penetrated states (Northern, Central & Eastern India) where it commands >50 per cent market share & new launches in the scooter & premium motorcycle segment in H2FY18E.

Edelweiss Financial
MAHINDRA AND MAHINDRA
CMP: Rs 1,555 Target Price: Rs 1,637

With good monsoons since last 2 years, M&M is a key benefi ciary of uptick in rural demand given its dominant positioning in tractors, strong recall for its UV brands like Bolero/Scorpio in the rural markets and uptick in demand for pickups (light commercial vehicles) in rural India

DHANUKA AGRITECH
CMP: Rs 715 Target Price: Rs 757

Dhanuka Agritech (DAL) boasts of a unique asset-light business model underpinned by core focus on marketing and distribution network, giving it an edge over competitors. The unique business model renders DAL the preferred partner of global innovators to venture into the rapidly surging Indian agrochemicals market. Moreover, a promising launch pipeline is bound to propel the company’s growth into higher gear.

JAIN IRRIGATION
CMP: Rs 74 Target Price: Rs 129

Driven by the Central Government’s push on Micro irrigation, Jain Irrigation (JISL) being the market leader, is expected to be the biggest benefi ciary of this push. Also, the planned IPO of the agro processing business will help unlock value and help reduce debt further.

Geojit Financial
ESCORTS
CMP: Rs 725 Target Price: Rs 800

Government’s focused approach to encourage farm mechanization and growth in infrastructure segment is expected to drive demand for tractors. We expect revenue & PAT to grow at 18 per cent & 37 per cent YoY CAGR over FY17-19E led by higher segmental revenue and new product launches.

UPL
CMP: Rs 738 Target Price: Rs 887

UPL has achieved healthy revenue CAGR of 16 per cent over FY12-17, with stable EBITDA at 17-19 per cent, despite widespread changes in regional weather patterns or swings in commodity prices and currencies. We expect PAT to grow at a strong CAGR of 14 per cent over FY17-19 led by new launches fast-growing geographies, backward integration, and sustained market share gains.

CANFIN HOMES
CMP: Rs 480 Target Price: Rs 612

Can Fin Homes Limited (CHFL) is the fastest growing HFC with a strong loan book CAGR of 38 per cent over FY12-17. Given the strong traction in loan book expansion and sustained healthy asset quality (Gross/Net NPA at 0.2 per cent/0.0 per cent as of FY17), we expect the return ratios to improve further in the medium term.