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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Policy thrust on the hinterland set to intensify further
We believe that the UPA government’s strategic political thrust on the Indian
hinterland is set to intensify further. The proposed land acquisition bill – which may
be taken up in monsoon session of parliament – will be by far the biggest
‘inclusive growth’ initiative, since the NREGA was launched by UPA 1.
Government’s ongoing policy thrust on rural India has led to elevated structural
prosperity in rural India (agricultural wages up 24% to 107% over past 3 years),
which is now feeding through, in an accelerated manner to semi urban India.
While the rural theme has resulted in re-rating of consumer staples sector, we are
yet to see a re-rating in consumer discretionary. Our favorites for re-rating are
tractor and two wheeler companies, where we see the possibility of elevated long
term demand trajectories (our preferences – Bajaj Auto and Mahindra & Mahindra)
Policy – Low expectations, will government surprise?
While expectations remain very low, coming monsoon session of parliament and
an election (states) free window till year end may see the government move
ahead on pending policy reform. We expect government to move forward on land
acquisition, pension reform, mining and banking amendment bills in forthcoming
parliament session. FDI in multi brand retail is also likely to be announced (this
does not need parliament approval). Banking amendment bill may also pave the
way for release of long expected draft guidelines on entry of Indian corporate
groups into banking sector.
Is the capex cycle set for a turnaround
Our capital goods analyst, Manish Saxena, sees nascent signs of a turnaround in
the capex cycle - Power volumes rising by 8% yoy for second consecutive quarter,
uptick in capex pickup in fertilizers, bearings, diesel engines and farm equipment
machineries. While the jury is not yet in and policy uncertainties worry the
corporate sector, the nascent signs of a pickup are encouraging.
Portfolio Musings – prefer rate sensitives, getting constructive on Capex
plays
We continue to remain overweight on rate sensitives – banking (private sector
banks, power finance companies) and real estate. Raising overweight on
consumer discretionary through M&M and Bajaj Auto. Raising overweight on
Larsen and Toubro. Reducing weightage of media stocks. Staying neutral on IT.
Increasing underweight on metals. Adding Titan, Aurobindo Pharma, IRB, Tech
Mahindra, JSPL and Tata Steel to model portfolio. Taking out Jubilant Foodworks,
Dish TV, Cairn India, SAIL and GAIL. Our model portfolio has outperformed MSCI
India by 260bps YTD and 460bps yoy. Our top large cap picks are: Bajaj Auto,
Bharti, Coal India, DLF, HDFC Bank, ITC, M&M, L&T and TCS. Our top mid cap
picks are : Aurobindo Pharma, Bharat Forge, Sobha Developers, Tech Mahindra,
United Phosphorous and Yes Bank.
Focus on hinterland to
intensify
Government’s thrust on the hinterland is set to accelerate
Land Acquisition bill may be the biggest pro rural India initiative since NREGA
While land acquisition has been the most vexing issue for Indian industry, it has become one
of the most emotive issues in Indian politics over the past few months. The acquisition of
agricultural land for non agricultural purposes by governments, exacerbated by inadequate
and uncertain compensation for the land, loss of livelihood for the displaced and involuntary
displacement without proper rehabilitation, have been at the forefront of popular debate
following the Singur incident and more recently events in Uttar Pradesh.
We believe that the government of India is looking to move ahead on the long proposed land
acquisition bill which will seek to balance many of the abovementioned contentious issues
ranging from the imperatives of development to balancing the rights and needs of the
displaced together with resolving the most vexatious issue of fair compensation. While the
draft guidelines are not yet put up for debate as promised by the Rural Development
minister, if the initial guidelines suggested by the National Advisory Committee are accepted,
the land acquisition bill may end up becoming the UPA government’s biggest inclusive
growth initiative since the highly effective NREGA scheme launched by the previous UPA
administration. We believe that many of the suggested proposals (compensation to be fixed
at 6x registered value of land and landless laborers to be given long term annuities fixed
around a formula centered on the minimum wage linked to inflation) could result in higher
land value for farmers and displacement benefits for the landless. While the jury is not yet in
on how industry will react to many of these proposals, we do believe that facilitation of easier
land acquisition – even though at a higher cost – may be welcomed by industry.
Mining amendment bill if implemented will be an additional positive for rural India
The government has recently in a draft mining bill, proposed that miners should bear higher
royalty burden or share 26% of profits with the locals, which bodes well for consumption
propensity of the displaced native community, if implemented. Our infra/materials teams
calculate that the draft mining bill, in its current form, could entail an injection of INR150bn of
funds (~US$3.4bn, 1% of Agri GDP) into India's tribal community.
Since the UPA 1 came to power in 2004, we have seen the government lay an aggressive
thrust on inclusive growth, primarily focused on raising prosperity levels in rural India.
Initiatives have included (i) raising minimum wages, (ii) raising minimum support prices for
procuring products, (iii) increasing rural road connectivity etc. We estimate that excluding
subsidies and minimum support prices the total budget for rural development has risen at a
CAGR of ~32%. These measures have resulted in a historic increase in prosperity in rural
India, and this is now spreading to semi-urban India in an accelerated manner eventually
resulting in booming commerce and services in tier 2 and tier 3 towns.
We continue to believe that consumption will remain at the forefront of India’s economic
growth and rising prosperity in India’s hinterland. Our discussions with several experts on
rural India suggest that there has been a mass re-calibration in wages across the rural
economy driven by the advent of NREGA wages. Over the past three years, agri wages in
most of the Indian states have grown at a pace far ahead of the average agri inflation
An assurance of a minimum wage for 100 days for member of every rural household under
NREGA has led to a shortage of farm labor leading to a spike in agricultural wages too. Over a
period of three years (Jan-08 to Dec-10) agri wages in several states have grown at a rate
which is >2x of the rise is agri inflation. For e.g. Andhra Pradesh witnessed a growth of
107% during the period while that for Punjab and Haryana rose by 84% and 75% while agri
inflation stood at 38%.
A surge in power demand suggests a nascent recovery
Indian power generation volumes grew at a rate of 10% yoy for the last two months. Looking
at the last four years, this is the first time that volume growth rose above 7-8% for two
quarters (much above trend-line demand of 4-6%). Demand is about a couple of percentage
points higher as T&D losses seem to have reduced. Unlike other commodities, power
generation will happen only when there is demand and when other sector volumes falter. Our
talks with SEBs, ministry of power and a few other users suggest that the surge in
manufacturing is being largely experienced by commercial- and export-oriented units, driving
up the power demand as incremental annualized demand in FY12 seems to be twice that of
FY11. In simple terms, today India is consuming up to twice as much incremental power as it
consumed in FY11. This suggests that two years’ worth of demand has come in one year,
which may be an indicator of nascent recovery.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Policy thrust on the hinterland set to intensify further
We believe that the UPA government’s strategic political thrust on the Indian
hinterland is set to intensify further. The proposed land acquisition bill – which may
be taken up in monsoon session of parliament – will be by far the biggest
‘inclusive growth’ initiative, since the NREGA was launched by UPA 1.
Government’s ongoing policy thrust on rural India has led to elevated structural
prosperity in rural India (agricultural wages up 24% to 107% over past 3 years),
which is now feeding through, in an accelerated manner to semi urban India.
While the rural theme has resulted in re-rating of consumer staples sector, we are
yet to see a re-rating in consumer discretionary. Our favorites for re-rating are
tractor and two wheeler companies, where we see the possibility of elevated long
term demand trajectories (our preferences – Bajaj Auto and Mahindra & Mahindra)
Policy – Low expectations, will government surprise?
While expectations remain very low, coming monsoon session of parliament and
an election (states) free window till year end may see the government move
ahead on pending policy reform. We expect government to move forward on land
acquisition, pension reform, mining and banking amendment bills in forthcoming
parliament session. FDI in multi brand retail is also likely to be announced (this
does not need parliament approval). Banking amendment bill may also pave the
way for release of long expected draft guidelines on entry of Indian corporate
groups into banking sector.
Is the capex cycle set for a turnaround
Our capital goods analyst, Manish Saxena, sees nascent signs of a turnaround in
the capex cycle - Power volumes rising by 8% yoy for second consecutive quarter,
uptick in capex pickup in fertilizers, bearings, diesel engines and farm equipment
machineries. While the jury is not yet in and policy uncertainties worry the
corporate sector, the nascent signs of a pickup are encouraging.
Portfolio Musings – prefer rate sensitives, getting constructive on Capex
plays
We continue to remain overweight on rate sensitives – banking (private sector
banks, power finance companies) and real estate. Raising overweight on
consumer discretionary through M&M and Bajaj Auto. Raising overweight on
Larsen and Toubro. Reducing weightage of media stocks. Staying neutral on IT.
Increasing underweight on metals. Adding Titan, Aurobindo Pharma, IRB, Tech
Mahindra, JSPL and Tata Steel to model portfolio. Taking out Jubilant Foodworks,
Dish TV, Cairn India, SAIL and GAIL. Our model portfolio has outperformed MSCI
India by 260bps YTD and 460bps yoy. Our top large cap picks are: Bajaj Auto,
Bharti, Coal India, DLF, HDFC Bank, ITC, M&M, L&T and TCS. Our top mid cap
picks are : Aurobindo Pharma, Bharat Forge, Sobha Developers, Tech Mahindra,
United Phosphorous and Yes Bank.
Focus on hinterland to
intensify
Government’s thrust on the hinterland is set to accelerate
Land Acquisition bill may be the biggest pro rural India initiative since NREGA
While land acquisition has been the most vexing issue for Indian industry, it has become one
of the most emotive issues in Indian politics over the past few months. The acquisition of
agricultural land for non agricultural purposes by governments, exacerbated by inadequate
and uncertain compensation for the land, loss of livelihood for the displaced and involuntary
displacement without proper rehabilitation, have been at the forefront of popular debate
following the Singur incident and more recently events in Uttar Pradesh.
We believe that the government of India is looking to move ahead on the long proposed land
acquisition bill which will seek to balance many of the abovementioned contentious issues
ranging from the imperatives of development to balancing the rights and needs of the
displaced together with resolving the most vexatious issue of fair compensation. While the
draft guidelines are not yet put up for debate as promised by the Rural Development
minister, if the initial guidelines suggested by the National Advisory Committee are accepted,
the land acquisition bill may end up becoming the UPA government’s biggest inclusive
growth initiative since the highly effective NREGA scheme launched by the previous UPA
administration. We believe that many of the suggested proposals (compensation to be fixed
at 6x registered value of land and landless laborers to be given long term annuities fixed
around a formula centered on the minimum wage linked to inflation) could result in higher
land value for farmers and displacement benefits for the landless. While the jury is not yet in
on how industry will react to many of these proposals, we do believe that facilitation of easier
land acquisition – even though at a higher cost – may be welcomed by industry.
Mining amendment bill if implemented will be an additional positive for rural India
The government has recently in a draft mining bill, proposed that miners should bear higher
royalty burden or share 26% of profits with the locals, which bodes well for consumption
propensity of the displaced native community, if implemented. Our infra/materials teams
calculate that the draft mining bill, in its current form, could entail an injection of INR150bn of
funds (~US$3.4bn, 1% of Agri GDP) into India's tribal community.
Since the UPA 1 came to power in 2004, we have seen the government lay an aggressive
thrust on inclusive growth, primarily focused on raising prosperity levels in rural India.
Initiatives have included (i) raising minimum wages, (ii) raising minimum support prices for
procuring products, (iii) increasing rural road connectivity etc. We estimate that excluding
subsidies and minimum support prices the total budget for rural development has risen at a
CAGR of ~32%. These measures have resulted in a historic increase in prosperity in rural
India, and this is now spreading to semi-urban India in an accelerated manner eventually
resulting in booming commerce and services in tier 2 and tier 3 towns.
We continue to believe that consumption will remain at the forefront of India’s economic
growth and rising prosperity in India’s hinterland. Our discussions with several experts on
rural India suggest that there has been a mass re-calibration in wages across the rural
economy driven by the advent of NREGA wages. Over the past three years, agri wages in
most of the Indian states have grown at a pace far ahead of the average agri inflation
An assurance of a minimum wage for 100 days for member of every rural household under
NREGA has led to a shortage of farm labor leading to a spike in agricultural wages too. Over a
period of three years (Jan-08 to Dec-10) agri wages in several states have grown at a rate
which is >2x of the rise is agri inflation. For e.g. Andhra Pradesh witnessed a growth of
107% during the period while that for Punjab and Haryana rose by 84% and 75% while agri
inflation stood at 38%.
A surge in power demand suggests a nascent recovery
Indian power generation volumes grew at a rate of 10% yoy for the last two months. Looking
at the last four years, this is the first time that volume growth rose above 7-8% for two
quarters (much above trend-line demand of 4-6%). Demand is about a couple of percentage
points higher as T&D losses seem to have reduced. Unlike other commodities, power
generation will happen only when there is demand and when other sector volumes falter. Our
talks with SEBs, ministry of power and a few other users suggest that the surge in
manufacturing is being largely experienced by commercial- and export-oriented units, driving
up the power demand as incremental annualized demand in FY12 seems to be twice that of
FY11. In simple terms, today India is consuming up to twice as much incremental power as it
consumed in FY11. This suggests that two years’ worth of demand has come in one year,
which may be an indicator of nascent recovery.
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