Government is likely to focus on strengthening the rural sector in the upcoming Union Budget on 1st February 2018. The expenditure allocation to rural sector is expected to increase as the government aims at job creation through implementation of several measures. In the past three years, the expenditure allocation of Ministry of Agriculture and Ministry of Rural Development has increased sharply. It went up from 5.8% in FY15 to 7.6% in FY18. Rural spending has significant effect on the growth rate in rural wages that leads to optimism in the rural sector.
Let us look at some stocks that will benefit with the government's rural theme in the upcoming budget 2018.
Hatsun Agro Products: The company is a dominant dairy player in its home state Tamil Nadu and surrounding southern states. It claims to have 10,000 milk banks covering 13,000 villages. Its strengths include 100% direct milk sourcing and shorter cash conversion cycle. According to Edelweiss, Hatsun's expansion of its procurement network outside of Tamil Nadu and deeper into untapped geographies will drive the company going forward. The company has gained over 87% in the last one year compared to Sensex that gained over 30%.
Hindustan Unilever: It is the largest FMCG company in India by sales. According to a report by Motilal Oswal, the company has the widest portfolio of products and the broadest distribution reach among its consumer peers. Over 40% of its sales comes from rural India and therefore, it is well placed to take advantage of the rural recovery. The company trades at premium valuations but the potential of strong earnings growth in future justifies the valuations. The stock gained over 58% in the last one year compared to sensex that gained over 30%.
Swaraj Engines: The company is engaged into manufacturing and supplying of diesel engines in the range of 22 HP to above 54 HP. The company is equipped with highly productive and precise quality analyzing machines. According to a research report by SMC Capital, the management of the company expects good demand growth of domestic tractors due to government's continued thrust on agriculture and rural sector. This will help the company to increase its market share. The stock gained nearly 50% in the last one year compared to sensex that gained 30.04%
Dabur: One of the top 5 consumer companies in terms of distribution reach with nearly 50% of sales comes from rural India. According to Motilal Oswal ,worries on both the wholesale channel due to GST implementation and rural sales (in both of which Dabur has a disproportionately high exposure compared to peers) are receding faster than expected. Dabur has the advantage of a weak base of rural growth in the past three years. Revival of rural sector will provide beneficial for rural dependent player like Dabur. The stock gained over 31% in the last one year, compared to sensex that gained 30.04%.
Jyothy Laboratories: It is a multi-brand, multi-product FMCG company with operations all over the country. The company's volume grew by a healthy 11.5% YoY in 3QFY18 while its gross margins expanded by 270bps YoY (up 130bps on comparable basis) to 48.3%. According to a research report by Reliance Securities, the demand is likely to accelerate, on the back of recovery in rural growth rates, continued distribution expansion, strong focus on IT, recovery in CSD channel and success of power brand strategy. Although the stock underperformed the market in the last one year by gaining only 7.6%, it will be benefited from higher rural spending as it will help the company to expand its market share and profits.