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The rural bandwagon continues to roll. Supportive government policies, greatly
improved farm economics, improved availability of financing and benevolent wealth
effects of sharp land price appreciation are driving significant changes in rural
consumption habits and lifestyle. We remain bullish on the rural consumption story.
Anchor themes
The rural story conforms to our bullish view on domestic consumption. It is also, in
part, responsible for elevated aggregate demand, which in a supply-constrained
economy is causing high inflation; a key reason for our cautious stance on the
market, in addition to slowing growth momentum and a sluggish investment cycle.
How to play the rural theme? Buy mechanisation, buy low penetration and buy
aspiration. The following stocks screen well on these criteria — Mahindra, Bajaj
Auto, ITC, Dish TV, and Jain Irrigation.
The rural juggernaut rolls on
Straight from the heartland
Seven analysts from our research team travelled to rural regions across the
country to better understand the rural story. They spoke to farmers, shop keepers,
auto dealers, 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 those we interviewed and have not tried to overlay
them with our personal views or couch them in economic statistics.
The rural economy — rising incomes, growing consumerism
Rural India is reaping the benefits of supportive government policies and
favourable farm economics. Crop prices have multiplied and benevolent wealth
effects of sharply rising land prices are underpinning rural incomes and propensity
to consume. Positive spill-over effects of strong economy-wide growth are
providing more opportunities to trade. Higher incomes are providing the seed
capital to diversify into ancillary farming and other non-farm sources of income.
With income and wealth effects both in the bag, rural consumption is on a roll. We
reckon that rural consumption is still in early stages of its evolution. Even as
incomes have increased dramatically, the propensity to spend will change only
slowly as the multiplier works its way over time.
Buy mechanisation, low-penetration and aspiration
The rural story is not easy to play. Rural India thus far has had only a marginal
share in the consumption of higher-end goods. Except for FMCG, telecom and a
few auto companies, the focus of corporate India has only recently shifted to the
rural story. Dearer and scarcer farm labour should lead to increasing substitution of
man with machine. Rising consumerism is fast underpinning rural consumption.
Top rural plays
We recommend the following stocks in our coverage universe as top rural plays —
Mahindra & Mahindra, Bajaj Auto, Dish TV, ITC and Jain Irrigation.
The rural story continues to unfold
The rural bandwagon continues to roll: The great Indian rural story is on a roll. It is
not new and has been much talked about. We think it has much longer to go. We
believe that the structural changes brought about in India’s rural economy are massive
and have significant investment implications.
A first-hand glimpse: The purpose of this report is not to contextualise the rural
growth story in a macroeconomic framework. It has been done before, and often.
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
better understand the rural story. They spoke to farmers, shop keepers, auto dealers,
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.
Incomes have multiplied, consumerism is fast catching on
Universal rise in incomes: The over-arching feedback from our field trips was the
impressive rise in rural incomes across the country. Incomes have risen anywhere
between 2-4x times (even higher in some cases) over the past four years. Several
factors are at play here.
1. Higher crop prices: Crop prices are up on account of government-administered
minimum support prices, rising prices of cash crops and export items (such as
grapes) and ever rising demand for food in a high-growth economy. While input
costs have also risen, the increase in incomes has been much stronger.
2. Government schemes: Government schemes have affected rural incomes in two
ways. First, the national rural employment guarantee (NREGA) scheme has
increased the bargaining power of marginal farmers and landless labourers
leading to a surge in wages and a shortage of rural labour in general. Second, the
general push by the government in rural infrastructure has resulted in better roads,
wider connectivity and greater availability of electricity. We note that the primary
driver of rural prosperity is increasing farm product prices, and NREGA and
government spending have been icing on the cake.
3. Availability of financing: Availability of financing has improved, partly because of
the push by the government and partly because of better penetration of banks and
other rural financing companies. Competition among NBFCs is heating up and
lending terms and conditions have become easier for farmers.
4. Wealth effect from rising land prices: As owners of a highly inelastic factor of
production like land, farmers have benefited immensely from benevolent wealth
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.
5. Spill-over effects of nationwide economic growth: Positive externalities from
years of strong nation-wide growth are paying off for rural India. Better and more
roads have increased trade with neighbouring villages, cities and states. Widening
reach of media, cable TV and mobile phones has spurred aspirational demand
and consumerism while mitigating business risk through timely dissemination of
information (about crop prices and weather patterns, for example). Broad
economic growth in the country and rising aggregate demand are providing fastexpanding
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
basis, rising incomes and benevolent wealth effects from the manifold increase in
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).
7. Susceptibility to droughts is falling: The other important takeaway from our
rural trips is that monsoons are no longer a key driving force as farmers, in general,
are significantly wealthier and their wealth in land significantly higher. Moreover,
the shortage of labour created by government policies and a general tilting of
terms of trade in the favour of the rural economy means that both landless
labourers and land-owning farmers are less susceptible to the risk of a monsoon
failures. We also note that non-agricultural activities are rising in rural areas and
this is reducing the level of dependence on pure agriculture as the predominant
source of income.
How to play the rural theme? Buy mechanisation, buy lowpenetration
and buy aspiration
We think that the following are the key ways to benefit from rising rural affluence:
1. Buy mechanisation
A common theme that emerged across the regions we visited was the strength of
wages paid to daily farm labourers. Rising costs of living and labour shortages
have been mainly responsible for the sharp appreciation of the price of farm labour.
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.
2. Buy low penetration
For all the progress and increase in wealth and incomes in the past few years,
rural India still remains vastly underpenetrated. Rural India thus far has had only a
marginal share in the consumption of higher-end goods. Except for FMCG,
telecom and a few auto companies, the focus of corporate India has only recently
shifted to the rural story.
3. Buy aspiration
Barring regional differences in tastes, preferences, and consumption habits, we
found the following common threads that ran across the regions we visited: 1) an
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.
Top rural plays
1. Mahindra & Mahindra (MM IN, BUY, CP INR788.2, PT INR892, Kapil Singh)
Tractors key beneficiaries of increased mechanization…: Mahindra &
Mahindra’s tractor segment will be a key beneficiary of the labour shortages being
created by the NREGA scheme, in our view. With nearly 40mn households being
employed under the NREGA scheme, there is a shortage of rural labour being
created.
…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.
2. Bajaj Auto (BJAUT IN, BUY, CP INR1307.4, PT INR1810, Kapil Singh)
Strong two-wheeler play: Bajaj Auto is the second-largest two wheeler company
in India with 27% domestic market share. The company has had an urban-focused
portfolio with 50% market share in the premium segment but only 20% in the
executive segment which forms 65% of the market.
Increasing rural focus: The company is now targeting increasing dealerships by
25% to increase focus on the rural segment. They are also looking to have more
products focused on the rural market. We are building in 15% growth in Bajaj
Auto’s volumes in FY12F. We value the company at INR1,810, based on DCFmethodology.
3. ITC (ITC IN, BUY, CP INR169.1, PT INR200, Manish Jain / Anup
Sudhendranath)
Top pick in FMCG space: In line with our broad theme of having a positive bias
on aspiration and low-penetration ideas across rural India, we have ITC as one of
the top picks in the FMCG space.
Up-trading to cigarettes: We believe that with farm incomes rising, rural
consumers getting more affluent, and aspiration levels rising, one of the key
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.
Foods business under-penetrated: ITC’s foray into other FMCG businesses
should also benefit from improving macro trends across rural India. Segments
such as biscuits, salted snacks and the like are still largely under-penetrated and
with the company offering these at price points which vastly improve affordability
for the rural consumer, the food segment could also see strong traction over the
short-to medium-term.
4. Dish TV (DITV IN, BUY, CP INR62.5, PT INR64, Jamil Ansari)
Biggest DTH player: Dish TV is the largest direct-to-home (DTH) player in India
currently, with 9.4mn subscribers in the country’s 30mn strong DTH market. We
believe growth in the DTH platform will continue unabated for the next few years
and might actually accelerate in the medium-term, eventually making DTH the
most dominant distribution system in the Indian television market.
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 bestplaced
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.
5. Jain Irrigation (JI IN, BUY, CP INR225.9, TP INR261, Aatash Shah)
Increased policy focus on micro irrigation: With current high food inflation in
India, the government will have to urgently look for solutions to increase farm
yields while conserving water. Implementation of micro irrigation systems can help
do this very effectively. We believe that there will be increased focus by the central
government on micro-irrigation. As part of the national mission status for micro
irrigation there already exists a significantly higher spending outlay on micro
irrigation, expansion of the subsidy beyond horticulture and better systems to
ensure quicker subsidy disbursements.
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
look towards mechanising their irrigation practices with MIS as the best alternative
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.
Valuation methodology and investment risks
Bajaj Auto (BJAUT IN)
We value Bajaj Auto based on DCF at INR1,810. This includes INR209/share of
bookvalue of investments. We are building in volume growth of 38% for FY11F and
15.5% for FY12F. We are building in 20.4% margins for FY11F and 19.7% margins for
FY12F. Risks include slower-than-expected volume growth; possibility of price wars
breaking out that could result in downside to our margin estimates; and a global
slowdown in domestic and/or export markets could present downside risks to our
volume estimates.
Mahindra & Mahindra (MM IN)
Valuation: Mahindra and Mahindra is our top pick in the India Auto sector. We value
Mahindra and Mahindra at INR 892/share. We value the standalone business at 13x
Average EPS of FY12 and FY13 (INR 51.2) at INR666/share and subsidiaries at INR
226/share. Key Risks: Ssangyong Motors acquisition: MM is planning to acquire
Ssangyong Motors in Korea (announced in August 2010). Below-normal rainfall in
2011: We have assumed a scenario of normal rainfall in 2011. Risks. If rainfall is
significantly different from normal, it could have a material impact on our volume
estimates. Excise duty increase: We have assumed that the excise duty will not be
increased from the current 10%. If it is increased further, it could have a material
negative impact on our margin estimates as the company may not be able to pass
through increases in excise duty on tractor components.
ITC (ITC IN)
We value the company using a sum-of-the-parts valuation methodology. We value the
core cigarettes business at INR149 per share based on a P/E multiple of 22x FY11F
earnings. The other core businesses are valued at around INR44 per share. We have
valued the net cash (after deducting corporate expenses) at book value. Risks: Policy
directives from the union government form the biggest risk to our investment view.
Jain Irrigation (JI IN)
We value JISL based on an earnings multiple of 20x our one-year rolling forward EPS
(methodology unchanged) to arrive at our target price of INR261.
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.
DISH TV (DITV IN)
Our 12-month price target of INR64 is based on a DCF valuation methodology. The
key assumptions are: 1) explicit earnings forecasts until FY30F; 2) a discount rate of
11.5%, based on a risk-free rate of 7.0%, a market risk-premium of 4.5% and beta of 1;
and 3) terminal growth of 5% from FY30E onwards. The key risks to our positive
stance on Dish TV include: 1) irrational pricing by some competitors trying to garner a
higher market share, even at the cost of profitability, and; 2) excessive churn of Dish
TV subscribers to either competitors in the DTH market or to other platforms (such as
digital cable, and IPTV).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Action
The rural bandwagon continues to roll. Supportive government policies, greatly
improved farm economics, improved availability of financing and benevolent wealth
effects of sharp land price appreciation are driving significant changes in rural
consumption habits and lifestyle. We remain bullish on the rural consumption story.
Anchor themes
The rural story conforms to our bullish view on domestic consumption. It is also, in
part, responsible for elevated aggregate demand, which in a supply-constrained
economy is causing high inflation; a key reason for our cautious stance on the
market, in addition to slowing growth momentum and a sluggish investment cycle.
How to play the rural theme? Buy mechanisation, buy low penetration and buy
aspiration. The following stocks screen well on these criteria — Mahindra, Bajaj
Auto, ITC, Dish TV, and Jain Irrigation.
The rural juggernaut rolls on
Straight from the heartland
Seven analysts from our research team travelled to rural regions across the
country to better understand the rural story. They spoke to farmers, shop keepers,
auto dealers, 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 those we interviewed and have not tried to overlay
them with our personal views or couch them in economic statistics.
The rural economy — rising incomes, growing consumerism
Rural India is reaping the benefits of supportive government policies and
favourable farm economics. Crop prices have multiplied and benevolent wealth
effects of sharply rising land prices are underpinning rural incomes and propensity
to consume. Positive spill-over effects of strong economy-wide growth are
providing more opportunities to trade. Higher incomes are providing the seed
capital to diversify into ancillary farming and other non-farm sources of income.
With income and wealth effects both in the bag, rural consumption is on a roll. We
reckon that rural consumption is still in early stages of its evolution. Even as
incomes have increased dramatically, the propensity to spend will change only
slowly as the multiplier works its way over time.
Buy mechanisation, low-penetration and aspiration
The rural story is not easy to play. Rural India thus far has had only a marginal
share in the consumption of higher-end goods. Except for FMCG, telecom and a
few auto companies, the focus of corporate India has only recently shifted to the
rural story. Dearer and scarcer farm labour should lead to increasing substitution of
man with machine. Rising consumerism is fast underpinning rural consumption.
Top rural plays
We recommend the following stocks in our coverage universe as top rural plays —
Mahindra & Mahindra, Bajaj Auto, Dish TV, ITC and Jain Irrigation.
The rural story continues to unfold
The rural bandwagon continues to roll: The great Indian rural story is on a roll. It is
not new and has been much talked about. We think it has much longer to go. We
believe that the structural changes brought about in India’s rural economy are massive
and have significant investment implications.
A first-hand glimpse: The purpose of this report is not to contextualise the rural
growth story in a macroeconomic framework. It has been done before, and often.
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
better understand the rural story. They spoke to farmers, shop keepers, auto dealers,
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.
Incomes have multiplied, consumerism is fast catching on
Universal rise in incomes: The over-arching feedback from our field trips was the
impressive rise in rural incomes across the country. Incomes have risen anywhere
between 2-4x times (even higher in some cases) over the past four years. Several
factors are at play here.
1. Higher crop prices: Crop prices are up on account of government-administered
minimum support prices, rising prices of cash crops and export items (such as
grapes) and ever rising demand for food in a high-growth economy. While input
costs have also risen, the increase in incomes has been much stronger.
2. Government schemes: Government schemes have affected rural incomes in two
ways. First, the national rural employment guarantee (NREGA) scheme has
increased the bargaining power of marginal farmers and landless labourers
leading to a surge in wages and a shortage of rural labour in general. Second, the
general push by the government in rural infrastructure has resulted in better roads,
wider connectivity and greater availability of electricity. We note that the primary
driver of rural prosperity is increasing farm product prices, and NREGA and
government spending have been icing on the cake.
3. Availability of financing: Availability of financing has improved, partly because of
the push by the government and partly because of better penetration of banks and
other rural financing companies. Competition among NBFCs is heating up and
lending terms and conditions have become easier for farmers.
4. Wealth effect from rising land prices: As owners of a highly inelastic factor of
production like land, farmers have benefited immensely from benevolent wealth
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.
5. Spill-over effects of nationwide economic growth: Positive externalities from
years of strong nation-wide growth are paying off for rural India. Better and more
roads have increased trade with neighbouring villages, cities and states. Widening
reach of media, cable TV and mobile phones has spurred aspirational demand
and consumerism while mitigating business risk through timely dissemination of
information (about crop prices and weather patterns, for example). Broad
economic growth in the country and rising aggregate demand are providing fastexpanding
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
basis, rising incomes and benevolent wealth effects from the manifold increase in
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).
7. Susceptibility to droughts is falling: The other important takeaway from our
rural trips is that monsoons are no longer a key driving force as farmers, in general,
are significantly wealthier and their wealth in land significantly higher. Moreover,
the shortage of labour created by government policies and a general tilting of
terms of trade in the favour of the rural economy means that both landless
labourers and land-owning farmers are less susceptible to the risk of a monsoon
failures. We also note that non-agricultural activities are rising in rural areas and
this is reducing the level of dependence on pure agriculture as the predominant
source of income.
How to play the rural theme? Buy mechanisation, buy lowpenetration
and buy aspiration
We think that the following are the key ways to benefit from rising rural affluence:
1. Buy mechanisation
A common theme that emerged across the regions we visited was the strength of
wages paid to daily farm labourers. Rising costs of living and labour shortages
have been mainly responsible for the sharp appreciation of the price of farm labour.
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.
2. Buy low penetration
For all the progress and increase in wealth and incomes in the past few years,
rural India still remains vastly underpenetrated. Rural India thus far has had only a
marginal share in the consumption of higher-end goods. Except for FMCG,
telecom and a few auto companies, the focus of corporate India has only recently
shifted to the rural story.
3. Buy aspiration
Barring regional differences in tastes, preferences, and consumption habits, we
found the following common threads that ran across the regions we visited: 1) an
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.
Top rural plays
1. Mahindra & Mahindra (MM IN, BUY, CP INR788.2, PT INR892, Kapil Singh)
Tractors key beneficiaries of increased mechanization…: Mahindra &
Mahindra’s tractor segment will be a key beneficiary of the labour shortages being
created by the NREGA scheme, in our view. With nearly 40mn households being
employed under the NREGA scheme, there is a shortage of rural labour being
created.
…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.
2. Bajaj Auto (BJAUT IN, BUY, CP INR1307.4, PT INR1810, Kapil Singh)
Strong two-wheeler play: Bajaj Auto is the second-largest two wheeler company
in India with 27% domestic market share. The company has had an urban-focused
portfolio with 50% market share in the premium segment but only 20% in the
executive segment which forms 65% of the market.
Increasing rural focus: The company is now targeting increasing dealerships by
25% to increase focus on the rural segment. They are also looking to have more
products focused on the rural market. We are building in 15% growth in Bajaj
Auto’s volumes in FY12F. We value the company at INR1,810, based on DCFmethodology.
3. ITC (ITC IN, BUY, CP INR169.1, PT INR200, Manish Jain / Anup
Sudhendranath)
Top pick in FMCG space: In line with our broad theme of having a positive bias
on aspiration and low-penetration ideas across rural India, we have ITC as one of
the top picks in the FMCG space.
Up-trading to cigarettes: We believe that with farm incomes rising, rural
consumers getting more affluent, and aspiration levels rising, one of the key
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.
Foods business under-penetrated: ITC’s foray into other FMCG businesses
should also benefit from improving macro trends across rural India. Segments
such as biscuits, salted snacks and the like are still largely under-penetrated and
with the company offering these at price points which vastly improve affordability
for the rural consumer, the food segment could also see strong traction over the
short-to medium-term.
4. Dish TV (DITV IN, BUY, CP INR62.5, PT INR64, Jamil Ansari)
Biggest DTH player: Dish TV is the largest direct-to-home (DTH) player in India
currently, with 9.4mn subscribers in the country’s 30mn strong DTH market. We
believe growth in the DTH platform will continue unabated for the next few years
and might actually accelerate in the medium-term, eventually making DTH the
most dominant distribution system in the Indian television market.
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 bestplaced
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.
5. Jain Irrigation (JI IN, BUY, CP INR225.9, TP INR261, Aatash Shah)
Increased policy focus on micro irrigation: With current high food inflation in
India, the government will have to urgently look for solutions to increase farm
yields while conserving water. Implementation of micro irrigation systems can help
do this very effectively. We believe that there will be increased focus by the central
government on micro-irrigation. As part of the national mission status for micro
irrigation there already exists a significantly higher spending outlay on micro
irrigation, expansion of the subsidy beyond horticulture and better systems to
ensure quicker subsidy disbursements.
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
look towards mechanising their irrigation practices with MIS as the best alternative
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.
Valuation methodology and investment risks
Bajaj Auto (BJAUT IN)
We value Bajaj Auto based on DCF at INR1,810. This includes INR209/share of
bookvalue of investments. We are building in volume growth of 38% for FY11F and
15.5% for FY12F. We are building in 20.4% margins for FY11F and 19.7% margins for
FY12F. Risks include slower-than-expected volume growth; possibility of price wars
breaking out that could result in downside to our margin estimates; and a global
slowdown in domestic and/or export markets could present downside risks to our
volume estimates.
Mahindra & Mahindra (MM IN)
Valuation: Mahindra and Mahindra is our top pick in the India Auto sector. We value
Mahindra and Mahindra at INR 892/share. We value the standalone business at 13x
Average EPS of FY12 and FY13 (INR 51.2) at INR666/share and subsidiaries at INR
226/share. Key Risks: Ssangyong Motors acquisition: MM is planning to acquire
Ssangyong Motors in Korea (announced in August 2010). Below-normal rainfall in
2011: We have assumed a scenario of normal rainfall in 2011. Risks. If rainfall is
significantly different from normal, it could have a material impact on our volume
estimates. Excise duty increase: We have assumed that the excise duty will not be
increased from the current 10%. If it is increased further, it could have a material
negative impact on our margin estimates as the company may not be able to pass
through increases in excise duty on tractor components.
ITC (ITC IN)
We value the company using a sum-of-the-parts valuation methodology. We value the
core cigarettes business at INR149 per share based on a P/E multiple of 22x FY11F
earnings. The other core businesses are valued at around INR44 per share. We have
valued the net cash (after deducting corporate expenses) at book value. Risks: Policy
directives from the union government form the biggest risk to our investment view.
Jain Irrigation (JI IN)
We value JISL based on an earnings multiple of 20x our one-year rolling forward EPS
(methodology unchanged) to arrive at our target price of INR261.
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.
DISH TV (DITV IN)
Our 12-month price target of INR64 is based on a DCF valuation methodology. The
key assumptions are: 1) explicit earnings forecasts until FY30F; 2) a discount rate of
11.5%, based on a risk-free rate of 7.0%, a market risk-premium of 4.5% and beta of 1;
and 3) terminal growth of 5% from FY30E onwards. The key risks to our positive
stance on Dish TV include: 1) irrational pricing by some competitors trying to garner a
higher market share, even at the cost of profitability, and; 2) excessive churn of Dish
TV subscribers to either competitors in the DTH market or to other platforms (such as
digital cable, and IPTV).
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