Consumption stocks to get the vote as rural tune plays in poll season

ET Intelligence Group: The consumption theme will continue to attract investors following the rising importance of the rural votes in assembly elections.

In the latest elections in Karnataka, the Bharatiya Janata Party (BJP) gained 69 rural seats compared with 22 during the previous election. It also fared well in pockets with higher farm distress. Earlier, in its

Karnataka

election manifesto, the party had laid out several farmer welfare schemes such as farm loan waiver of Rs 1 lakh and direct income support of Rs 10,000 for small and marginal farmers.

With several state elections lined up in the next 12 months followed by the general elections in 2019, the consumption theme mainly driven by the rural-focused

stocks

is likely to dominate Dalal Street. The Nifty consumption index has outperformed the Nifty

benchmark

index by 6 per cent in the past one year.

In a note after the Karnataka elections, brokerage UBS said: “Rural exposed stocks will continue to do well irrespective of whether the policy tilt towards rural or agricultural is real or rhetoric.” It expects companies including Hero MotoCorp, Shriram Transport Finance, Ujjivan Financial Services, Dalmia Bharat, Emami and Marico to gain.

The union government and several state governments such as Rajasthan, Madhya Pradesh, Chhattisgarh are likely to maintain their pro-rural stance. The Madhya Pradesh government has launched Bhavantar Bhugtan Yojana, a scheme to hedge price risk in agriculture produce wherein farmers are compensated for distress sales below the minimum support price (MSP) announced by the Union government.

“We believe that it’s an opportune time to raise weightings in consumption plays. Consumer staples are the best way to play the rural consumption theme, but valuation multiples of 40x-55x is a major challenge,” CLSA, a brokerage, said in a report. The brokerage has increased the weight on Mahindra and Mahindra by 100 basis points to 6.1 per cent in its model portfolio compared with the MSCI India weight of 2.1 per cent.

Improving disposable income in rural areas in the medium term bodes well for companies which derive sizeable revenue from the rural market. The list includes tractor makers Mahindra & Mahindra and Escorts, automakers Hero MotoCorp and Maruti Suzuki, cement companies like UltraTech, and consumer goods companies such as Hindustan Unilever,

Dabur

, Emami, ITC, and Bajaj Corp.