Market Impact of the MSP Hike -Positive for rural consumption plays:: Religare Research

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Market Impact of the MSP Hike
Positive for rural consumption plays
We take a quick look at agri plays in the light of government’s revision of
Minimum Support Prices (MSP) for this winter (rabi) crop. Coming on the back
of a favourable monsoon, the hike (for FY12) is set to further boost India’s rising
rural income/consumption levels. The revision also poses an upwards risk to
our FY12 agri GDP estimate, currently at 3.2%, and implies that food inflation
is unlikely to go down in a hurry.
Key themes to play in agri consumption are Mahindra & Mahindra (M&M),
Hero Honda Motors (HHML), Mahindra & Mahindra Financial Services
(M&MFSL) in the discretionary space, and Hindustan Unilever (HUL), Dabur,
and Jyothy Laboratories (JYL) among staples.
Govt. hikes MSP for the FY11 rabi crop: The government has hiked MSP (floor
prices for farm-gate agri produce in India) for various rabi (winter) crops
cultivated this fiscal. The higher prices, which would come into effect next
(FY12) fiscal, range from ~1.8% for wheat to ~20% for pulses. (Please refer our
note ‘Higher MSPs to boost winter crop harvest and prices too’ for details).
Higher prices to boost rural income…: Improved realisations for farmers, along
with an almost certain bumper rabi harvest (esp. wheat, oilseeds) —thanks to a
favourable monsoon—will boost rural incomes for the next fiscal as well. This, in
turn, poses an upward risk to our FY12 estimate (currently at 3.2%), despite the
high base effect (FY11 agri GDP expected to rise 7%, nearly double the longterm
average). Our current estimates for overall growth in FY11/FY12 stand at
8.5%/8.9%.
…and consumption too: Steadily rising incomes have improved consumption
levels in rural India, a market that has benefited from positive network
externalities and seen a robust wealth effect (in terms of real estate and gold
ownership) in recent years. Increased consumption could be played with:
1. Discretionary plays like Autos—HHML (55% of topline), M&M (50% rural,
35% from tractors) and to some extent Maruti Suzuki (16% and rising).
2. Staples— HUL, Dabur, and JYL (limited upside, though).
3. Financing plays—M&MFSL and PSU banks (due to an improvement in asset
quality).
4. Food processors like REI Agro.
5. Fertilizers like Tata Chemicals and Rallis India that would benefit indirectly
(although upside from current levels is limited).
...and food inflation at the macro level: Increased rural incomes from higher
MSP unfortunately also feed into macro food inflation that is unlikely to go down
in a hurry for now.