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Rural Safari – III Our third journey took us through the lake city of Bhopal, palace city of Mysore and to the drought hit regions of Marathwada among others enabling us to understand recent rural economy trends and identify key growth drivers. Our analysts covered 14 districts across 8 states that account for 52% of India's agri GDP. We present the key findings from rural India in this report.
All eyes on monsoon:
Deleveraging to precede big-ticket spending
Stocks mentioned: Hero Motocorp Mahindra Finance
JM Financial Institutional Securities Limited 4 May 2016
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 2
Table of Contents
Contents Page No.
Focus Charts 5
About Rural Safari 8
Farm income trends and current outlook 10
Good monsoon would boost farm income 13
Non-farm income remains supportive 18
Financial inclusion 25
Increasing indebtedness in Rural India 30
Deleveraging and small ticket purchases to take front stage 34
Sector Comments
Consumer goods 38
Automobiles 42
NBFC 51
Cement 57
Company Sections
Mahindra Finance 59
Hero Motocorp 62
Appendix I 65
Appendix II 67
Appendix III 68
Appendix IV 69
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 3
Deleveraging to precede big-ticket spending
Our rural survey I and II conducted in FY15 and FY16 had alerted to the
possibility of weak rural consumption due to declining incomes and waning
wealth in rural India. In this report, we present the findings of our third
rural survey, where we observe that a) farm incomes have fallen further, b)
asset values (especially land prices and transactions) are mostly stagnant
(except in select places), c) debt/assets of farmers have likely risen by 200-
300bps over past 3 years. On the positive side, we note a) Rabi crop
production could be higher YoY though short of govt. estimates, b)
infrastructure/ irrigation spending is supporting non-farm income
(something that we did not see 6 months back) and c) run-rate of loan
recoveries has increased YoY in places where there are no drought-like
conditions. In our view, a normal monsoon has the potential to increase
farm incomes by 20+% YoY in FY17 while higher rural spending by
governments should support non-farm income. But given the increase in
leverage and still very weak real estate markets, we expect the initial
savings to go into deleveraging and small ticket purchases. We prefer to
play the deleveraging through Mahindra Finance and discretionary via Hero
Motocorp. Interestingly, we note that the “Patanjali” phenomenon is not yet
that deeply penetrated in rural India and might still be an urban+Tier-2/3
cities phenomenon.
Lack of water, unseasonal rain affects ongoing Rabi crop: Decline in
ground water level (20%YoY lower reservoir levels during sowing) has
affected yield and quality of crop, and unseasonal rains during mid-march
added to the burden. Hence, there is a downward risk to the 2nd
advance
government production estimate (in Feb’16) of Rabi crop (Exhibit 3). Our
rural survey also confirms possibility of a downward revision though the
production is likely to be higher YoY.
Outlook on farm income (36% of rural): We estimate low productivity, weak
MSP growth and lower net sown area to have negatively affected farm income
(-7% YoY) in both FY15 and FY16. Farm income could grow by 20% in FY17
on the back of a) yield reverting due to good monsoon (as predicted by IMD),
b) supportive MSP prices c) benign rural wage growth (4.8%YoY in Dec’15).
Outlook on non-farm income (64% of rural): The recent pick up in
spending on job guarantee programs (2HFY16 higher by 11% HoH), irrigation
(state govt) and rural development (road construction) has supported non-
farm income by holding up wages, tractor demand and sub-contracting
works given to small section of farmers. With restart of sand mining, non-
farm income has been supportive to total rural income. Going ahead, with
states continuing to spend on agriculture, irrigation and rural development
(exhibit 7), we believe the share of non-farm income is likely to increase.
Deleveraging and small ticket purchases to take precedence: Over past 3
years, we estimate debt/assets for rural households to have risen from 7.5%
to 9.8% with highest increase amongst smaller farmers (exhibit 54). Going
forward, we estimate savings from initial crops to go towards deleveraging
and small ticket purchases. We prefer to play the initial stage of rural
recovery through Mahindra Finance (improvement in recoveries and NIM
expansion to lead to strong 30% EPS CAGR over FY16-18E) and Hero
Motocorp (upside risks to earnings on the back of increase in volume
growth). 1.
Other interesting findings: We noticed that Patanjali is now an urban +
rurban phenomenon, with penetration in rural India building up and posing
risks to FMCG sector. Secondly, we came across usage of technology by
Panchayats to efficiently deliver government services (Box 7), usage of DBT
in reducing leakages for student scholarship schemes and farmers taking on
contracting jobs for irrigation works to boost their income (Box 3).
Suhas Harinarayanan
Tel: (91 22) 66303037
Arshad Perwez
Tel: (91 22) 66303080
Loganathan B
Tel: (91 22) 66303351
Shyam Sriram
Tel: (91 22) 66303077
Varsha Bhansali
Tel: (91 22) 6630 3372
Ambrish Mishra
Tel: (91 22) 66303019
Richard Liu
Tel: (91 22) 6630 3064
Vicky Punjabi
Tel: (91 22) 6630 3065
Karan Uberoi
Tel: (91 22) 66303082
Nikhil Walecha
Tel: (91 22) 6630 3027
Kunal Randeria
Tel: (91 22) 66303075
Exhibit 1: JM Analysts covered 8 states,
which account for 52% of agriculture
GDP
Source: JM Financial
India Strategy
13 November 2015
India | India Strategy
4 May 2016
JM Financial Research is also available
on: Bloomberg - JMFR <GO>,
Thomson Publisher & Reuters,
S&P Capital IQ and FactSet
Please see Appendix I at the end of this
report for Important Disclosures and
Disclaimers and Research Analyst
Certification.
.
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 4
Exhibit 2. Eight states, 14 districts, 2,200+ Kilometers
Amritsar
Amritsar, located at India-
Pakistan border is a major
religious, commercial
centre. Sikhs’ holiest
shrine - Golden Temple is
located in the city,
making tourism one of
the largest industry here.
Wheat, Rice, Maize and
Potato are key crops
Varanasi/Chandauli
Varanasi is the largest
trading hub for agri-
commodities in eastern
UP and a famous religious
tourist destination.
Wheat, Paddy, Bajra,
Arhar, Sugarcane and
Potato are key crops in
the region
Firozpur
Firozpur is the largest
district of Punjab on the
Indo-Pak border. The
district has 73% rural
population with major
dependence on agriculture.
Key crops are Wheat,
Cotton, Maize and
Vegetables
Patna
Patna, the capital of Bihar,
is a city with many
religious attractions. 57%
of population in the
district is rural and
Paddy, Wheat, Arhar,
Gram, Bajra, Barley, and
Chillies are key crops
Bhopal
Bhopal is the capital city of
Madhya Pradesh and is
also called city of lakes for
its various natural as well
as artificial lakes and is
also one of the greenest
cities in India. Key crops
are Wheat, Gram, Lentil,
Peas, Linseed and
Soyabean
Warangal
Located in Telangana,
Warangal was earlier the
capital of Kakatiya
dynasty. The region
depends primarily on
monsoon and seasonal
rainfalls besides the
Kakatiya canal. Today, it
is one of the 100
proposed smart cities.
Major crops are Paddy,
Cotton, Mango and Wheat
Raisen & Sehore
Raisen is a rural district
about 50km from capital
city Bhopal (78% rural
population). It has many
tourist attractions
including Buddhist Sanchi
Stupa. Wheat, Soyabean,
Rice, Gram, Lentil, Maize,
Vegetables are the key
crop. For Sehore district,
adjacent to Bhopal, key
crops are Wheat, Gram,
Lentil, Peas and Linseed
Mysore
Located at the foot of
Chamundi hills, Mysore is
the 3rd most populous city
of Karnataka. Globally
renowned for its palaces, it
served as the capital city
of Kingdom of Mysore for
6 centuries. While tourism
is the major industry,
predominant crops are
Paddy, Jowar, Ragi, Cotton,
Tobacco and Maize
Aurangabad
Located near Godavari
basin, the city is named
after Mughal emperor
Aurangzeb and is a major
tourism hub with some of
UNESCO World heritage
sites. Agriculture is well
diversified with wide
range of crops like Jowar,
Pearl Millet, Wheat, Gram,
Soyabean and Cotton
Mandya
A prominent agricultural
district of Karnataka,
Mandya is situated near
river Cauvery and almost
half agricultural land
receives irrigation from
Krishna Raj Sagar and
Hemavathi. Major crops
include Paddy, Sugarcane,
Ragi and Horsegram
Ahmadnagar
Ahmadnagar is a rural
district of Maharashtra
(80% rural population)
situated in the
Marathwada region. Key
crops in the region are
Jowar, Sugarcane, Wheat,
Gram and Cotton. The
district has been facing
severe water shortages
due to drought conditions
Coimbatore
Coimbatore is the second
largest city in Tamil Nadu,
after Chennai. It is a major
industrial hub. The district
has rural population of
24% and key crops are
Paddy, Jowar, Maize, Gram,
Sugarcane, Chillies and
Coconut
Source: Company, JM Financial
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 5
Focus Charts…
Exhibit 3. We travelled to 8 states with majority of them suffering higher rainfall deficit than national average
Travelled to 8 states accounting for 52% of agri-GDP
Our survey indicates high probability of downward revision to
2nd
advanced estimates of Rabi production
States visited Share of
agri-GDP
Monsoon
Deficit (%)-
2014
Monsoon
Deficit (%)-
2015
UP 13.0% -49% -45%
Maharashtra 8.4% -20% -26%
Madhya Pradesh 7.3% -21% -14%
Karnataka 5.4% 4% -24%
Bihar 4.8% -17% -28%
Punjab 4.7% -50% -32%
Telangana 4.6% -34% -20%
Tamil Nadu 4.2% -1% -10%
Total 52.3% -12% -14%
Source: Rural Safari, Note: Second advanced estimates of Rabi output as released during Feb 2016
Exhibit 4. Crop yields have declined over the past few years; however, a good monsoon can lift yields in FY17
Based on our survey and analysis, crop yield declined during
last two years
IMD has predicted 106% of normal rainfall in 2016 (1st
forecast)
Source: Rural Safari, IMD
Exhibit 5. Agri commodity prices have always increased during the periods of La Nina
Post hitting the maximum, Oceanic Nino Index has started to
decline indicating the end of El Nino
Agri commodity prices across monsoon periods
Source: Rural Safari, Oceanic Nino Index, Climate Prediction Center
3.9%
8.4%
-7.6%
-15.2%
0.4%
-4.4%
-11.8%
-20%
-15%
-10%
-5%
0%
5%
10%
Cereals Wheat Rice Coarsecereals -
Total
Pulses Sugarcane Cotton
2015-16 Rabi Crop forecast - YoY (%)
10.0
11.0
12.0
13.0
14.0
15.0
16.0
2010 2011 2012 2013 2014 2015 2016
Rice Wheat(qtl/acre)
-7.0%
-20.6%
2.2%
-12.5%
-0.5% -0.6%
5.3%
-1.9%
-22.5%
2.6%1.0%
-7.9%
5.2%
-12.6%-14.5%
6%
(0)
(0)
(0)
(0)
(0)
0
0
0
2001 2004 2007 2010 2013 2016
% Monsoon Deficit (%)(%)
(2.0)
(1.0)
0.0
1.0
2.0
3.0
Feb-02 Nov-03 Aug-05 May-07 Feb-09 Nov-10 Aug-12 May-14 Feb-16
(%)
0
0.2
0.4
0.6
0.8
1
0
50
100
150
200
250
300
350
400
450
Jan-01 Jan-04 Jan-07 Jan-10 Jan-13 Jan-16
La Nina El Nino Cotton Wheat Corn(%)
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 6
Exhibit 6. While realization has declined over the past 3 years, better monsoon should aid realization and profitability
going forward
Last 3 years MSP growth has been low; likely to remain in
mid-single digits in FY17
Driven by improvement in yield and slow wage growth, we
expect realization/cost to bottom out in FY16
Source: CMIE, Rural Safari
Exhibit 7. Non-farm income will remain supportive of total income on the back of government spending while wealth
effect has completely waned in the past 3 years
Rural related capex for states have been on the rise with
centre also stepping up capex
Wealth effect has tapered off as land prices are stable/down in
most places we visited
State Real estate trend
Uttar Pradesh
Maharashtra
Madhya Pradesh
Karnataka
Bihar
Punjab
Telangana
Tamil Nadu
Source: State Budgets, Rural Safari
Exhibit 8. Significant difference in water requirement among crops - renders certain states much more vulnerable to
monsoon than others
Water requirement of major crops Variation across states’ dependence on monsoon
Crop Water
Requirement (mm)
Crop Water
Requirement (mm)
High Water Requirement Moderate Water requirement
Sugarcane 1,500-2.500 Pepper 600-900
Cotton 700-1300 Potato 500-700
Sunflower 600-1000 Maize 500-800
Low Water Requirement Rice (paddy) 450-700
Cabbage 350-500 Tomato 400-800
Onion 350-550 Barley/Oats/Wheat
450-650
Pea 350-500 Soybean 450-700
Source: FAO, NSSO,JM Financial
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
2012 2013 2014 2015 2016
Paddy MSP - YoY (%) Wheat MSP - YoY (%)
Wage growth - YoY (%)
1.0
1.4
1.8
2.2
2.6
3.0
2005 2007 2009 2011 2013 2015 2017
Rice Wheat
(Realization/Cost per acre)
10%
30%
93%
21%
10%14%
0%
20%
40%
60%
80%
100%
Gujarat Karnataka Telangana Rajasthan Punjab Tamil Nadu
Rural Related Capex (%YoY)(FY'17 growth)
Cutivation Income Irrigation Cover Water Intensity of crop Farm VulnerabilityAP
Bihar
Gujarat
Haryana
Karnataka
Maharashtra
MP
Punjab
Rajasthan
TN
UP
Good Moderate Bad
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 7
Exhibit 9. Lower income in the past 3 years have affected the consumption in Rural India
Reduction in frequency of consumption and delay in
purchasing is evident in weak volume growth of rural stocks
Good monsoon plays a crucial part in determining rural
consumption
Source: NSSO, RBI, Company Data, JM Financial
Exhibit 10. Weak base and good monsoon are expected to support income growth and help repair rural balance sheet
Agri income is expected to rise as non-agri remains
“supportive” for a robust total income growth
Weak income levels have affected the balance sheet of farmers
as debt ratios increased in the last 3 years
Source: NSSO, NDDB, Rural Safari, Note: An average farmer with 1.1ha land holding
Exhibit 11. Deleveraging and small ticket purchases to take precedence
Given the high leverage we expect building up of savings and
deleveraging to be the first activity
Given the pressure on land prices, consumption elasticity
would decline in short term leading to delay in big ticket
purchases
Source: NSSO, MOSPI, Rural Safari
(40)
(20)
0
20
40
60
1QFY10 1QFY11 1QFY12 1QFY13 1QFY14 1QFY15 1QFY16
HUL 2W Tractor(%)Monsoon Rural Credit Growth Tractor Volume Growth 2W Volume Growth
CY05
CY06
CY07
CY08
CY09 Loan Waiver Scheme Loan Waiver Scheme
CY10 1st year of New Govt.
6th pay commission
1st year of New Govt.
6th pay commission
CY11
CY12
CY13
CY14
CY15
Good Moderate Bad
-1%
16%
7%
-7%
11%
2%
-7%
6%
0%
20%
6%
12%
-10%
-5%
0%
5%
10%
15%
20%
25%
Agri income growth Non-Agri income growth Total income growth
FY14 FY15 FY16 FY17E(%)
7.5% 7.5%
8.3%
9.8%
10.2%
8.0% 8.2%
8.4%
9.0%
8.3%
6%
7%
8%
9%
10%
11%
FY13 FY14 FY15 FY16 FY17E
Debt/Asset Interest / income(%)
7.5%
8.3%
9.8% 9.7%
0.5%
6%
7%
8%
9%
10%
11%
FY14 FY15 FY16 FY17E
Debt/Asset(%)
6.4
10.7
17.4
11.6
13.6
17.6
0.6
0.8
1.0
0.0
0.2
0.4
0.6
0.8
1.0
1.2
0
4
8
12
16
20
FY94-05 FY05-10 FY10-12
MPCE Rural per capita GDP Multiplier (RHS) (x)(% CAGR)
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 8
About Rural Safari
8 States, 14 districts and 2,200+ Kilometers
In continuation of our efforts to understand rural India, our analysts left their
desks and went out to the rural hinterland in sweltering heat and sun. We
travelled more than 2,200kms, covering 14 districts across 8 states of India to
meet a variety of stake-holders. We met farmers – large and small, small business
owners, FMCG dealers, auto dealers, bank managers, small shop and service
owners among others. We looked at how rural demand has been impacted by the
crop failures during last two years, what are the key concerns of rural population
and what is their spending outlook. We also looked at how efforts on cash
transfer, financial inclusion etc. are making an impact on rural economy. We also
probed the impact of “Patanjali” brand usage across our travels.
Exhibit 12. Our travel took us to states accounting for more than 50% of India’s agri-GDP
States where we went and their share in agriculture GDP Interacted with a variety of stakeholders in rural India
Source: Rural Safari
Exhibit 13. Stark variation across the country – Rain-fed/irrigated areas show normal output, while others suffer steep
decline in farm output
Fields with near normal wheat crop in Madhya Pradesh
Quite a difficult period in the Marathwada region of
Maharashtra
Source: Rural Safari
UP, 13.0%
Maharashtra, 8.4%
Madhya Pradesh, 7.3%
Karnataka, 5.4%
Bihar, 4.8%
Punjab, 4.7%
Telangana, 4.6%
Tamil Nadu, 4.2%
52.3% of agriculture GDP of India
Farmers
Agri-Labourer
Agri Mandi operator
FMCG dealer
Auto Dealer
SMEs
Politician
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 9
IMD predicts above normal monsoon in 2016
Post 2 seasons of deficit monsoon, IMD predicts monsoon to be above
normal for the upcoming season. With Indian agriculture still dependent on
monsoon rains (only 46% of net sown area irrigated) a substantial portion of
agricultural land in India still remains rain-fed. With higher probability of
“above normal” rainfall (34 percent) and normal rainfall (30 per cent) there is
growing optimism that domestic consumption demand will pick up,
particularly in rural India, and help fasten the pace of economic growth.
IMD (first prediction, April) predicts the upcoming season to have above normal
rainfall at 106% as the effects of El Nino rolls back. In the recent history
predictions of IMD has been with better accuracy compared to the previous
decade (2001-2010). Second prediction of monsoon will come in June’16.
Exhibit 14. IMD predicts upcoming monsoon to be above normal
Monsoon deficit/surplus in the last 15 years IMD prediction accuracy has increased in recent past
Source: IMD, CMIE, Note: Accuracy measured against first IMD prediction (Apr)
With large portions of land still dependent on good monsoon rains, the
correlation between agri-GDP and quantum of rains has a strong positive
correlation. With prediction of an above normal monsoon, agri-GDP could get a
boost post 2 years of sluggish growth.
Exhibit 15. Monsoon showers and agri-GDP have high correlation
Source: JM Financial
-7.0%
-20.6%
2.2%
-12.5%
-0.5% -0.6%
5.3%
-1.9%
-22.5%
2.6%1.0%
-7.9%
5.2%
-12.6%-14.5%
6%
(0)
(0)
(0)
(0)
(0)
0
0
0
2001 2004 2007 2010 2013 2016E
% Monsoon Deficit (%)(%)
-5.1%
-21.4%
6.5%
-12.5%
1.5%
6.9%
10.8%
-0.9%
-19.3%
4.7%3.0%
-7.0%
7.4%
-8.0% -8.1%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
2001 2003 2005 2007 2009 2011 2013 2015
Difference in IMD forecast and actual rainfall (%)
(15)
(10)
(5)
0
5
10
15
20
(30) (25) (20) (15) (10) (5) 0 5 10 15 20 25Rea
l Ag
ri-G
DP
gro
wth
(%)
Rainfall - % deviation from LPA
IMD has predicted 106% of normal rainfall in
2016 (first prediction), second prediction about
monsoons would come in June of 2016
Above normal rainfall would boost agri-GDP as
correlation between agri-GDP and quantum of
rain has steep positive correlation
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 10
Farm income trend and current outlook
Despite declining share of farm income in rural India (approx. 1/3rd
),
agriculture continues to be one of the major drivers of rural economy as
farming still employs c.50% of labor force in India. Therefore, farm income is
of critical importance for any recovery in rural spending.
Last two years (2014 and 2015) have turned out to be weak in terms of
agricultural produce as well as realizations - low MSP growth, weak global
commodity prices impacting market prices of cash crops. Even wage rate
growth has reduced from earlier double digit growth levels, thereby
accentuating impact on marginal farmers as well.
Two consecutive monsoon deficits (2014 & 2015) and unseasonal rains in
Feb-Mar 2015 have led to 3 consecutive crop declines.
During 2014 and 2015, monsoons were lower by 12%/14% from the long period
averages. The coverage of irrigation is only c.46% for the country, and thereby
lack of rainfall directly impacts crop output. As a result of weak monsoon and
accentuated by unseasonal rains in Feb-Mar 2015, Indian agriculture has seen
overall three consecutive bad crops (Kharif 2014 & 2015), and Rabi 2015.
Exhibit 16. Two consecutive monsoon deficits – with some states receiving
20%+ below normal rainfall
Source: CMIE, IMD
Exhibit 17. Three consecutive crop failures in last two years have set a weak back-drop for agriculture income
Production declined in last two Kharif crop cycles
2015 Rabi output was additionally impacted by unseasonal
rains in Feb-Mar 2015
Source: CMIE, Note: 2015-16 4th
Advanced estimates
-7.0%
-20.6%
2.2%
-12.5%
-0.5% -0.6%
5.3%
-1.9%
-22.5%
2.6%1.0%
-7.9%
5.2%
-12.6%-14.5%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
2001 2003 2005 2007 2009 2011 2013 2015
Monsoon Deficit/above normal (%)
-0.3% -0.1%-0.8%
-4.4%
-15.1%
-2.8%
-0.9%
-8.6%
-6.5%
-8.4%
-16%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
Cereals Rice Coarse-cereals Pulses Major Oilseeds
2014-15 - Production -YoY (%) 2015-16 production - YoY (%)
-8.6%-9.7%
-7.0%
-1.4%
2.9%
-3.1%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
Cereals Wheat Rice Coarsecereals -
Total
Sugarcane Cotton
2014-15 - YoY (%)
3 Consecutive crop declines have adversely
impacted farm-income
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 11
Exhibit 18. More than half of Indian farms are still not covered under irrigation
Net irrigated area increased from 18% at time of
independence to 46% (net irrigated) by 2012
Irrigation in India has expanded on account of investment in
tube-wells – Sources of irrigation share (%)
Source: CMIE
How has been the current Rabi crop output (2016) and pricing trend?
After 3 consecutive crop weakness (output declines), our visit indicated an initial
trend of likely moderate decline in crop output during Rabi 2016 season (Nov-
Apr 2016) as well. The primary causes for weakness in crop output stem from –
(a) two years of deficit rains (2014 and 2015) which have led to ground-water
depletion and thereby less water for irrigation, and
(b) Unseasonal rains impact (mid-March 2016)
The key crop of Rabi season (wheat) needs 3-4 times irrigation during the crop
cycle. Therefore, states/areas with irrigation facilities reported normal yields
(Punjab), while we noted decline in yields of up to 20-30% YoY in some places of
UP and MP. Ground-water level has gone down significantly, as is reflected in the
lower water storage across the country (c.30% YoY lower in second half of April
2016).
Exhibit 19. Reservoir levels indicate decline in water levels during 2016
Due to two years of deficient rains (2014, 15) water levels
continued to deplete and have impacted Rabi crops
Reservoir level depletion is directly correlated with previous
year monsoon
Source: CMIE, Note: LPA- Long Period Average
18
46
-
5
10
15
20
25
30
35
40
45
50
Irrigated area as % of net sown area
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Tube-Wells Canals Other Wells Tanks Other Sources
1951 1961 1971 1981 2001 2012
Tube- wells have become the key source of irrigation in India
0
10
20
30
40
50
60
70
Reservoir current Storage as % of Live storage
Live storage continues to deplete
0
20
40
60
80
100
120
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16
Reservoir levels - As % of live storage at Full Reservoir Level
Rainfall - % of LPA (previous year)
Lack of sufficient water for irrigation due to
two bad monsoons and unseasonal rains in Feb-
Mar 2016 have put downward pressure on Rabi
2016 crop output
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 12
Unseasonal rains during later part of Rabi season (Feb-April) proved to be
detrimental as the crop quality gets adversely impacted (it does not develop
properly). We had seen massive impact of unseasonal rains during Feb-Apr 2015,
which drove down Rabi output in 2015 (c.10% YoY decline in wheat production).
Again, in 2016, there was spell of unseasonal rains, particularly during mid-
March 2016. Our visits indicated high impact from the unseasonal rains in
some states such as Bihar, Eastern UP and some parts of MP, while farmers in
South India and Western India, reported minimal impact due to unseasonal rains.
However, the impact from unseasonal rains in 2016 is likely to be less than
2015.
Net-net, both of the above reasons lead us to believe that the crop output in
Rabi 2016 is likely to decline from normal production levels. Therefore, we
believe there is a downward risk to the current 2nd
advanced estimate
released by Government for Rabi 2016 production. (Annexure 2)
Box 1: Yield decline in Rabi crops due to deficient rains
During our visit to Benipur village (at the border of Varanasi and Mirzapur
district in Eastern UP), we could clearly see the impact of deficient rainfall.
Water level went down significantly, leading to difficulty in obtaining water for
consumption purposes as well as for irrigation.
Exhibit 20. Apart from the productivity quality of produce has been impacted adversely by scarcity of water
A deficient wheat crop in a village in Varanasi district
Water levels have gone down – driving scarcity of water for
irrigation and drinking
Source: Rural Safari
Tube-well is the key source of irrigation in these areas and ground water level
has gone below some of tube-wells’ level and in addition paucity of electricity
(average 6 hours/daily with erratic time-lines) accentuated irrigation problem.
These regions also saw unseasonal rains during Mar 2016, which has resulted
in average yield declining to 8-9 qtl/acre from 12qtl/acre in a normal year.
Along with decline in yield, the quality of produce is also inferior (shown in
image above).
It is to be highlighted that Eastern UP still has sufficient irrigation cover while
in regions such as Marathwada (Maharashtra) with severe drought conditions
and weak irrigation cover, crop yields (such as Cotton, Sugarcane, Onions)
have likely declined sharply.
Our survey also indicated that adverse impact
from unseasonal rains (Feb-Mar 2016) on the
Rabi 2016 crop output is likely to be less than
that in 2015
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 13
Good monsoon would boost farm income
Even though the past 4 crops (including Rabi 2016) have been weak, a good
monsoon would increase farm income on the back of improved productivity
and probable higher net sown area. Even though MSP growth in the past 3
years have been weak, due to inflationary reasons MSP hike for upcoming
Kharif season would be supportive rather than sharp. Many international
MET Departments are also predicting onset of La Nina by September and
global agri commodity prices usually increases during La Nina periods. Rise
in global agri prices would also help farm income.
Good rains would aid productivity: There is significant correlation of crop yield
with monsoon rainfall, as still c.50%+ of Indian agriculture does not have
irrigation coverage and thereby depends only on rainfall. Even in regions where
there is irrigation, monsoon impacts indirectly as lack in rainfall reduces water-
table level and tube-wells which are dug at higher levels, become ineffective, as
we have seen in our trips at multiple locations.
Exhibit 21. Crops yields vary significantly with monsoon
Yield of Rice (10qtl/acre) has varied in line with monsoon Yield of wheat (13qtl/acre) also depends on monsoon
Source: CMIE, JM Financial
Exhibit 22. Correlation of yield with monsoon deficit/excess varies across
crops - Pulses and Oilseeds at c.55% while Wheat at c.81% correlation
Source: CMIE, JM Financial, Correlation from 2001-2014
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
2001-02 2003-04 2005-06 2007-08 2009-10 2011-12 2013-14
Monsoon - Deficit/Excess (%) Rice Yield - YoY (%)
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
2001-02 2003-04 2005-06 2007-08 2009-10 2011-12 2013-14
Monsoon - Deficit/Excess (%) Wheat Yield - YoY (%)
60.1%
81.1% 81.1%
50.0%
59.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Rice Wheat Coarse-Cereals Pulses Oil-seeds
Co-relation of yield with monsoon (%)Yields for most of the crops are strongly
correlated with monsoon; hence good monsoon
would aid in yield growth after two years of
consecutive decline
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 14
MSP price hike would be supportive rather than steep: Most international met
departments are predicting an end to El Nino and return to neutral levels by end
of May. The Oceanic Nino Index tracking the progress of climate has declined in
January post continuous rise to maximum value. The decline indicates the
possibility of El Nino ending soon. Various international met departments have
indicated the possibility of formation of a La Nina by September.
Exhibit 23. Post hitting the maximum, Oceanic Nino Index has started to
decline indicating end of El Nino
Source: Oceanic Nino Index, Climate prediction center
During La Nina periods, agriculture commodities tend to increase in prices due to
reduction in production (owing to heavy rains) worldwide. As shown in Exhibit 24,
during the periods of La Nina (Oceanic Nino Index reaching less than negative 1:
FY08, FY11) agri commodity prices have risen sharply. Hence, the weather turning
to La Nina might help agri commodity prices to rise.
Exhibit 24. Agri commodity prices have always increased during the periods of La Nina
Movement in agri commodity (Coffee, Palm Oil, Rice) prices Movement in agri commodity (Cotton, Wheat, Corn) prices
Source: Bloomberg, Climate Prediction Center, JM Financial
(2.0)
(1.0)
0.0
1.0
2.0
3.0
Feb-02 Nov-03 Aug-05 May-07 Feb-09 Nov-10 Aug-12 May-14 Feb-16
(%)
0
0.2
0.4
0.6
0.8
1
0
100
200
300
400
500
600
700
Jan-01 Jan-04 Jan-07 Jan-10 Jan-13 Jan-16
La Nina El Nino Coffee Palm Oil Rice(%)
0
0.2
0.4
0.6
0.8
1
0
50
100
150
200
250
300
350
400
450
Jan-01 Jan-04 Jan-07 Jan-10 Jan-13 Jan-16
La Nina El Nino Cotton Wheat Corn(%)
Historically, during La Nina periods commodity
prices increase due to reduction in production
(owing to heavy rains); any increase in agri
commodity prices going forward would aid
farm income
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 15
While government’s stated intent is to double farmer’s income, a steep price rise
would be inflationary and hence we expect the price hike to be rather supportive.
The current MSP price being higher than global prices also acts as a hindrance for
high price hike.
Exhibit 25. Low MSP hikes in the past 3 years
Source: CMIE
Boost in profitability after a period of sluggishness: Farm income profitability
has struggled in the last 3 years due to low MSP hikes, low productivity and high
costs (high labor cost growth). With the parameters expected to reverse in
upcoming monsoon season, profitability is set to increase sharply based on our
estimates. We expect profitability to bounce back as profit per acre would
increase by 10-12%.
Exhibit 26. We expect good monsoon in 2016 to boost farm income in FY16-17
Rice and wheat crop to see improved profitability driven by
higher yield
Vegetables have high yield but realizations remain volatile
Source: CMIE, JM Estimates.
8%
16%
5%4% 4%
15%
5%
4% 4%
5%
0%
4%
8%
12%
16%
20%
2012 2013 2014 2015 2016
Paddy Wheat(%)
1.00
1.20
1.40
1.60
1.80
2.00
2.20
2.40
2.60
2.80
3.00
2005 2007 2009 2011 2013 2015 2017
Rice Wheat
(Realization/Cost per acre)
1
2
3
4
5
6
7
8
9
2005 2007 2009 2011 2013 2015 2017
Arhar Potato Onions
(Realization/Cost per acre)
MSP growth has slowed down during last 3
years; due to inflationary reasons we expect
the price hike to be supportive rather than
sharp
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 16
Importance of spatial distribution of monsoon
Due to deficient rains for last two year and drought situations in many parts of
the country, there has been focus on crops and their water requirements.
Government is encouraging farmers to take up less water intensive crops in
drought prone zone (such as movement away from sugarcane), however the shift
in crop pattern would be a medium to long term process.
Exhibit 27. Crops and water requirement
Crop Crop water need
(mm/total growing period)
Total growing period
(days)
High Water requirement
Sugarcane 1,500-2.500 270-365
Banana 1,200-2,200 300-365
Citrus 900-1200 240-365
Cotton 700-1300 180-195
Sunflower 600-1000 125-130
Moderate Water requirement
Pepper 600-900 120-210
Potato 500-700 105-145
Peanut 500-700 90-100
Maize 500-800 75-140
Rice (paddy) 450-700 90-150
Tomato 400-800 135-180
Barley/Oats/Wheat 450-650 120-150
Soybean 450-700 135-150
Low Water Requirement
Cabbage 350-500 120-140
Onion 350-550 105-140
Pea 350-500 90-100
Bean 300-500 120-150
Source: FAO
Exhibit 28. States dependence on rainfall, based on water intensity of their
key crops
Source: JM Financial
In the heat map above, we have analyzed major agrarian states and water
requirement of their key crops along with irrigation coverage and cultivation
income as % of agri-household income. AP (including Telangana), Gujarat,
Karnataka and Maharashtra come as states with high vulnerability to rainfall as
compared to other states.
Cutivation Income Irrigation Cover Water Intensity of crop Farm Vulnerability
AP
Bihar
Gujarat
Haryana
Karnataka
Maharashtra
MP
Punjab
Rajasthan
TN
UP
Good Moderate Bad
Significant variation in water intake of crops;
state with low irrigation cover, high cultivation
income and higher share of water guzzling
crops have much more dependency on good
rainfall
fall
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 17
Box 2: Diversification in Farming – Rose plantation is a highly profitable
business, capital constraints limit it to large farmers
We also noticed various levels of incentives and encouragement provided by
State Governments to drive higher income levels for farmers. In Madhya
Pradesh, we came across a farm which has started growing Rose flower over
the last 2 years. The farm owner has 20 acre+ land, of which 1 acre is under
rose farming.
In terms of cost incurred for the rose plantation – after sowing the first crop
yield starts after 6 months. The average cost of operations per month is
c.Rs10,000/acre. Rose farming needs highly skilled labor – from pesticide
disbursement to irrigation and to cut flowers. Over a six month period, the
first crop can be about c.0.1mn flowers which sell at an average price of Rs2-
3/flower in normal seasons. The price shoots up near valentine period
(February) when flowers sell up to Rs10/flower. Post the first crop, flowers are
again produced over the next 2-3 month cycle over next six years.
Exhibit 29. Example of Rose Farming in MP
Rose Farming is encouraged by the state Government Requirement of skilled labour force for Rose farming
Source: Rural Safari
State Government promotes farmers to take up floriculture, aids in soil
testing, provides seeds and pesticides which are suitable for flower
plantation. However, given the large investment and long duration of
produce, only large farmers are able to take up the highly profitable (but
risky) businesses in agriculture.
Large farmers are able to diversify into highly
profitable and newer areas such as Rose
farming. State Governments initiatives and
support goes a long way in the adoption of new
farming practices
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 18
Non-farm income remains supportive
Over the years, share of non-farm income has steadily increased to support
consumption growth in rural India. Major sources of non-farm income are a)
dairy farming b) wage based occupation c) sand mining d) tractor income
and e) opening up a new business. The recent pick up in MGNREGA
spending (2HFY16 spending up 11% from 1HFY16), irrigation (state govt)
and rural development (road construction) have supported non-farm income
by holding up wages (even increase in southern states), tractor demand and
sub-contracting works given to small section of farmers. With sand mining
getting restarted, non-farm income has been supportive to total rural
income. Going ahead, with states continuing to spend on agriculture,
irrigation and rural development we believe non-farm income will continue
to aid rural income.
Dairy income shows weakness on the back of price pressure: While milk
prices have held up in some states, others have witnessed a drag in the last 1 to
2 years. Due to weak production, cattle feeds for cows have also witnessed sharp
rise in certain states. As a result of increased feed cost and price pressure, dairy
income has shown marginal weakness in the past 2 years. The pressure on dairy
income has been compensated by other sources of non-farm income.
Sand mining holds up tractor demand and non-farm income: As sand mining
picks up pace in most parts of the country, it acts a profitable revenue stream for
the farmer. Also, it compensates for the fall in tractor demand from agriculture
sector. With brick kiln activity also holding up, demand for tractors have
benefitted farmer’s income.
Exhibit 30. Sand mining and brick kiln activity picking up
Sand mining in Telangana Brick kiln activity in Punjab
Source: Rural Safari
Contracting works in certain states provide sharp income boost: As
government spending steps up in certain states by means of developing irrigation
and rural spending, farmers are getting the benefits of sub-contracting,
employment generation and high wages in Telengana and South-Karnataka. In
both the states, farmers are taking up construction of canal or lake works to
boost their incomes.
Our survey indicated weakness in dairy income
in some states, however infrastructure related
activities have shown pick-up
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 19
Exhibit 31. Infrastructure spending visible in pockets across country
Lake creation in Mysore Lake extension in Warangal
Source: Rural Safari
In Karnataka (villages of Gaddige and Hanumanthapura, close to Mysore) and
Telangana (Warangal) farmers have been given contract work for digging lakes
and extending the existing lakes around the villages. With a good monsoon the
water level in these lakes would help farming and improve ground water level in
nearby regions as well.
Box 3: Mission Kakatia in Telangana
Telangana Government had launched Mission Kakatia during 2015 with the
aim to revive tank based irrigation through silt removal. The Government has
taken up a total of 46,531 tanks to revive in 10 districts (20% each for the
next 5 years).
State Government has also expedited the process of tendering and decision
making at lower levels and the completion of this project will also help
increasing the ground water level of nearby regions.
There has been high demand of labor due to the project work of Mission
Kakatia leading to high wages in Telangana as compared to other states. Our
interaction with farmers indicated that regions where there has been tank
revival, water availability has improved and farmers have reported higher
yields. However, the heat wave condition at present in the state might delay
the completion plans for the current year.
Based on our discussions, contracting works for digging the lake and
even sub-contracting works for laying out canal (low requirement of
technology) are given out to farmers and hence adds to the rural income.
In our visit we came across a farmer who has taken up sub-contracting work
for construction of a small stretch of canal yielding him Rs0.2mn (50% of his
usual income). The canal work has been divided up and given to many
farmers in the region which will boost the non-farm income for the region.
Hence this project apart from helping to increase the yield of farming and
ground water availability, also acts a huge boost to non-farm income in the
hands of farmers.
Mission Kakatia aims to revive tank based
irrigation in Telangana; non-farm income has
seen significant boost in regions where project
work has been taken up
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 20
Exhibit 32. Infrastructure spending aids in generating non-farm income
Varanasi – Clean up and expansion of Varuna river Six lane highway construction in Eastern UP
Source: Rural Safari
We saw significant infrastructure development projects near Varanasi - Road
projects, Ganga clean-up and Varuna river project work are clearly visible. Work
on infrastructure seems to have picked up in the last six months (since we last
visited).
Box 4: Non-farm income is critical for a small farmer’s consumption
During our trips, we met small and marginal farmers to understand their
earnings and consumption pattern. Our discussions with a small farmer (2
acre owner) in North India indicated that farm income is clearly in-sufficient to
meet the house-hold needs.
We met another farmer in Raisen district of MP who has 2 acre field. The
farmer grows 1 crop of paddy and 1 crop of wheat over a year. He earns
Rs30-35,000 per acre on a good crop, leading to farm income of c.Rs60-
70,000 per year, he has three children and his monthly expense is Rs10,000
with half of it spent on food and the rest on clothes, other consumables,
study materials, medical etc.
To finance the deficit (5,000 per month), he and his wife take up odd jobs as
labor in nearby areas. The farmer sends his children to Government schools
as he is unable to pay the private school’s charge of Rs6-7,000 as admission
fees and Rs150/month fees.
In terms of food consumption – they grow vegetables in their house and
typical in-take of vegetables is 2-3 days a week. Due to sharp increase in the
price of pulses, they take pulses not more than 3-4 times a month. The grains
provided by PDS is used for house-hold consumption and any delay in
obtaining PDS food, impacts them adversely.
Farm income is in-sufficient to support a small
agriculture family
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 21
NREGA expenditure picks up pace in 2HFY16 as development expenditure
remains mixed
The NREGA spending for FY15 witnessed a fall of 5% from FY14 and 1HFY16
followed a similar path as it declined 10% YoY. However, 2HFY16 has seen
momentum in NREGA expenditure as overall FY16 spending increased by 17.6%
YoY on a low base of FY15. The increased expenditure spending will help in
improving the non-farm income.
Consequently, the number of person days of employment has also
witnessed a rebound in 2HFY16 as it increased 30% from 1HFY16 levels.
Number of person days has increased by 40% from the low base of FY15. This
would increase the net number of days a person gets paid and subsequently will
increase the income for the farmer. Hence, contribution from NREGA to non-
farm income of farmers (marginal) saw a pickup in 2HFY16.
Exhibit 33. Pick up in NREGA expenditure combined with increased person-days’ work supports income levels
NREGA monthly wage expenditure trend Person-days’ work under NREGA – Sharp pick up
Source: nrega.nic.in, JM Financial
While spending on NREGA has seen a pick, central government spending on
agriculture has witnessed a sharp fall (-16%YoY) even as road projects spending
witnessed a boost (18% YoY). Rural development spending remained benign at
5% YoY. Hence, development induced employment opportunities in rural is
mixed with roads having a boost and other sectors being benign.
Exhibit 34. Government concentrating more on development related projects
(FYTD)
Source: CMIE, JM Financial
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
April May June July Aug Sept Oct Nov Dec Jan Feb March
FY16 FY15 FY14(Rs MM)
0
50
100
150
200
250
300
350
April May June July Aug Sept Oct Nov Dec Jan Feb
FY16 FY15 FY14(MM)
0
100
200
300
400
500
600
700
800
Road Transport Rural development Agriculture
FY12 FY13 FY14 FY15 FY16(Rs bn)
After YoY decline of 5% in FY15 and 10% in
1HFY16, strong growth rebound in 2HFY16 leads
to 18% YoY growth in NREGA expenditure in FY16
Development projects have witnessed a slight
higher spending but overall employment
generation remains weak
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 22
Government plans to increase spending on irrigation, agriculture and
developmental expenditure
Going ahead we expect government spending to aid in holding up tractor
demands, labor wages, employment generation and business opportunities.
Hence, we expect non-farm income to remain supportive and add to total income.
Central government steps up spending on agriculture and allied activities:
With government’s agenda of doubling farmers’ income in 5 years, government
has allocated higher amounts from budget towards agriculture and rural
development compared to other developmental expenditure such as roads (IEBR
in roads increased 112% while budget share growth is 6%).
Exhibit 35. Central government allocation towards rural based ministries shows an increase
Central plan outlay of ministries
Even as central plan allocation to roads is less, centrally
sponsored state roads have witnessed share increase
Source: Union Budget, JM Financial
States increase spending on agriculture and rural development: With
consecutive monsoon failures and crop failures inducing stress in rural economy,
most states have increased the allocation for rural development, irrigation,
agriculture and allied activities to smoothen the pressure. While, states with low
irrigation facilities (Karnataka, MP) have increased spending on irrigation to
20%YoY, other states chose to spend in rural development and agriculture sector.
However, certain states like Bihar have not opted to increase spending in either of
agriculture, rural development or irrigation.
Exhibit 36. Most states have budgeted for increase in spending in either of Agri, Rural development or Irrigation
Spending in Agri and Rural a key focus area for most of the
states
While Telangana plans very high growth in irrigation spend,
few other states have budgeted 20%+ growth in irrigation
spend for FY17
Source: State Budget, JM Financial
0
50
100
150
200
250
300
350
400
450
500
Road Transport Rural development Agriculture
FY15 FY16 FY17(Rs bn)
0
100
200
300
400
500
600
700
800
FY15 (A) FY16 (RE) FY17 (BE)
NHAI+MoRTH Rural roads North East Allocated to State Plan(Rs Bn)
27%
2%
(3%)
41%
(8%)
7%
24% 21%
11%
20%
25%
-20%
0%
20%
40%
60%
Gujarat Karnataka Telangana Rajasthan Punjab Tamil Nadu
Agriculture Rural Development(% FY 17 growth)
3%
20%
194%
34% 21%
35%
20%
-10%
20%
50%
80%
110%
140%
170%
200%
Gujarat Karnataka Telangana Rajasthan Punjab West Bengal MP
Irrigation and Flood Control(% FY 17 growth)
States have increased spending on rural
development and agriculture
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 23
Faster implementation of 7th
Pay commission would aid rural consumption
Central government budget accounts for 60% of Pay hikes: We estimate
central government budget to include Rs 450-500bn to compensate for pay hike
recommendation. We estimate the allocated amount to take into effect only 60%
of the pay hike recommendations and hence will be available only for a little
more than half a year. However, the pay hike will help in boosting consumption
demand. With 53% of the employees residing in z-class (Tier-III cities), rural areas
will also be beneficial from the pay hike.
Exhibit 37. Central pay hikes would boost consumption even in Rural India
7th CPC would see pay hiked by close to 25-35% Share of employees in different cities
Source: Central govt census, 2014, X-Class: Tier-1 (8 cities), Y-Class: Tier-II, Z-Class: Tier-III cities, JM Financial
Pay hikes by state government to come into effect from FY18: Post central
government pay hikes, state government usually follow the central govt
recommendations to provide hikes for their employees as well. However, in FY17
state budgets, the effect of pay hikes is not witnessed in any of the state
finances. The growth of employee expenses in all state finances remains
moderate to rule out the inclusion of pay hikes. While most states have not
commented on the timeline for implementing 7th
pay commission, we expect
states will gradually start implementing from FY18. Given that the number of
state government employees is higher with greater rural presence,
implementation of pay commission recommendations by state government will
give a huge boost to rural economy.
Exhibit 38. Weak growth in staff cost (FY17 BE) indicates deferral of pay
hikes
Source: State budgets, JM Financial
0
50,000
100,000
150,000
200,000
250,000
HAG PB-4 PB-3 PB-2 PB-2 PB-1
Old Salary Est. Increase(Rs)
18.1
29.2
52.8
0
10
20
30
40
50
60
X-Class Y-Class Z-Class
(%)
10.7
8.3
10.5
12.1
8.6
0
2
4
6
8
10
12
14
Bihar Karnataka Punjab Tamil Nadu West Bengal
(%)
Wage hikes from 7th
pay commission expected to
come in States from FY18 onwards
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 24
Box 5: ‘Lassi’nomics – Case of a ‘lassi’ (yoghurt based drink) shop owner
Enroute our rural trip near Varanasi, Uttar Pradesh, we came across a small
shop ‘Shivprasad Lassi Bhandar’ selling ‘lassi’ (yoghurt based drink). The
shop is located at Ramnagar.
Some trivia about the locality: Ramnagar is a city and a municipal board in
Varanasi, Uttar Pradesh. Ramnagar has a fort known as Ramnagar Fort which
is still considered the residence of King of Varanasi (Benares).
Varanasi being a pilgrimage site, people from across the country throng the
place throughout the year. Most locals/cab drivers take the visitors to this
‘lassi’ shop that is considered to be of the best quality in the neighborhood.
Several travel sites also contain information on this ‘lassi’ shop.
What surprised us was the highly profitable operation he ran despite
being a small scale player. On an average, he makes a net profit of
c.Rs1.52mn and a net profit margin of 51% on the back of a) improving
popularity and brand establishment b) steadfast quality control c) increasing
flow of visitors and d) stable realizations.
Exhibit 39. ‘Lassi’ Shop and its products in Ramnagar, Varanasi, UP
‘Shivprasad Lassi Bhandar’ Lassi being prepared and served
Source: Rural Safari
Exhibit 40. ‘Lassi’nomics
Detailed break-up Amount (Rs)
No of 'lassi' sold per day 200
Price per cup 50
Total revenue per day 10,000
Revenue per year 3,000,000
Cost per year 1,472,000
Raw material (RM) cost per cup 20
RM cost per day 4,000
RM cost per year 1,200,000
Rent per year 120,000
Employee cost per year 72,000
Electricity cost per year 30,000
Other misc. expenses 50,000
Net Profit per year 1,528,000
Net profit margin (%) 51%
Source: JM Financial
Highly profitable business of selling a single
product ‘lassi’ (Yogurt based drink)
Review of the lassi shop on a reputed travel site:
https://www.tripadvisor.in/Restaurant_Review-
g297685-d3383930-Reviews-
Shiv_Prasaad_Lassi_Bhandar-
Varanasi_Uttar_Pradesh.html
Review
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 25
Financial inclusion, DBT focus to be a long term
driver for rural India
The efforts towards financial inclusion, JAM (Jan Dhan Yojana, Aadhar, Mobility)
are likely to improve the targeting of Government schemes and eventually better
cash flow to the end farmer/citizen. However, this is a long process and the
outcomes would be based on efficiency in execution. So far government has
managed to enroll 216mn accounts under PMJDY schemes. With higher
linkage of subsidy to PMJDY accounts and increased usage of bank
accounts, the share of zero balance accounts has declined to 26.5% from
56% same period last year. During our trip, we could sense the changes in rural
India, with Aadhaar card becoming ubiquitous, first time users of bank accounts
and increasing comfort with mobile usage.
Exhibit 41. PMJDY account enrolments continue in full-swing and have now crossed 216mn+
Enrolments under PMJDY have touched 216mn+ as on Apr’16
Share of Zero balance accounts has been falling over the
months
Source: PMJDY, JM Financial
Box 6: Financial inclusion efforts – Meeting with Central Bank of India
official, Raisen, MP
As per the official, there has certainly been an improvement in devolution of
funds to the rural and agricultural segment. Banks are more focused than
earlier to increase financial inclusion.
The key traditional loan offerings to farmers are – (a) Kisan credit card which
is an overdraft facility given to farmer at subsidized rate and the amount is
based on his land holding. The rate of approval varies across regions – some
districts in MP have Rs23,000/acre as the approved rate, so a 5 acre farmer
gets Rs115,000 overdraft facility and additional amount, adjudged by the
manager. (b) Term loans which are given based on additional collateral and
properties.
The new scheme which is getting attention in their area is the MUDRA (Micro
Units Development and Refinance Agency) loans. There are three schemes
named – (a) Shishu loans of up to Rs50,000 where Aadhar based
identification is required and no collateral is required, (b) Kishor loans of up
to Rs 5 lakhs and, (c) Tarun of up to Rs 10 lakhs.
Banks have set up aggressive targets of extending at least 25 MUDRA loans
per month. This has benefited small-shop owners, fruit-vegetable
vendors, small businesses and small farmers to avail of the credit
facility.
37
69
93
125
153171
190205
216
0
50
100
150
200
250
Total A/C Rupay Debit Card(mn)
87.6
26.5
15
25
35
45
55
65
75
85
Sep-14 Oct-14 Dec-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16
(%)
Share of zero balance accounts in PMJDY scheme
down from 56% same time last year to 27% at
present
MUDRA loans (less than 50,000) with easier
processing requirement enables small farmers
and business owners to avail of institutional
credit
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 26
Box 7: Strengthening and empowerment of local village administration –
Key to effective delivery of services to farmers
Meeting with Sarpanch
We visited a Gram panchayat in Pachamah village (1,700 inhabitants, 84
Below Poverty level families, 200 MGNREGA card-holders) in Sehore district
(Madhya Pradesh). This gram panchayat has been awarded by the Chief
Minister and district administration for enabling innovative farming practices,
improvement in irrigation and prompt delivery of Government services. The
high education levels and dedication of its key officials has aided
performance - Sarpanch is a 28 year old MBA graduate (also a farmer) and
another key official in the panchayat is an MCA graduate. This enables
Pachamah Gram panchayat to be ahead in terms of adoption of modern
technology and get knowledge about farming related issues in time.
Exhibit 42. A village Panchayat in Sehore district, MP
Sarpanch (centre) is an MBA grad Board-room in the panchayat Video-conferencing and digital awareness
Source: Rural Safari
Low salary levels of Gram Panchayat members
What is to be noted is that despite gram panchayat’s importance, salary levels
of its official are quite low. A Sarpanch (head of Gram Panchayat) gets salary
of Rs1,700/month, which is much below the labor rate given in MGNREGA
(Rs178/days+ or Rs5,340 for 30 days). Sarpanch on an average has to spend
3-4hours/day during the month, including few full days when they have to
travel to meet district administration or if some official is visiting the village.
Allocation of Gram Panchayat budget to be transparent
We also came to know that allocation of budget to the Panchayat’s are now
based on population and it reduces the discretion of district officials. At
present in MP, the minimum allocation of Panchayat yearly is - (a) Rs 5 lakhs
for <2K populated villages, (b) Rs8lakhs/year for 2k-5k population, (c) Rs10
lakhs for 5k+ population. 20% of the allocation is kept for administrative
purposes and thereby the allocated budget seemed very limited for the
development purposes.
Gram Panchayat remains key medium for
delivering Government services to the villagers.
A well-functioning gram panchayat goes a long
way in improving economic conditions of a
village, as illustrated by Pachamah village.
Extremely low salary levels for key officials of
gram panchayat and modest budgets remain a
key impediment to development of small villages
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 27
Direct benefit transfer (DBT) to plug leakages in the system
The use of direct cash transfer in LPG (Liquefied Petroleum Gas) has already led
to better targeting of Government subsidies. A number of Government schemes
are also shifting towards direct cash/account transfer, which will improve the
targeting and disbursal, in our view. Subsidy as % of GDP has come down from
2.6% in FY13 to 1.9% in FY16RE and is expected to be 1.7% in FY17BE.
A discussion with Central bank of India official substantiated the magnitude of
savings which can be achieved through direct cash transfer. Two years back, in
an audit of the grant and process followed in a scholarship scheme, only 130
beneficiaries out of 1,200 recipients could be traced. Post the change in
disbursement methodology (scholarship now provided directly in student’s bank
account), an audit six months back could trace up to 95% of the recipients.
Box 8: DBT in Public Distribution System would benefit in long run, but
needs careful implementation on account of being critical for small and
marginal rural population
The leakages in distribution of food-grains and Sugar/salt through the public
distribution system (PDS) can be improved with use of technology and
Aadhaar based targeting. Our interaction with small and marginal farmers
indicated that distribution of essential commodities has improved over last
few years in some of the regions, though the quality of commodities obtained
from PDS may be inferior as compared to that from the open market. Despite
the perceived lower quality, PDS has been essential support for their basic
consumption and any material change in distribution should be implemented
gradually
Exhibit 43. DBT in the PDS would go a long way in removing leakages in the current system
A sample receipt of PDS – Rice, Wheat, Salt - Rs1/kg, Sugar -
Rs13.5/kg and Kerosene - Rs16.9/litre
Interaction with small and marginal farmers in Raisen district,
MP
Source: Rural Safari
There have been 26 districts in country where DBT in Kerosene has been
launched from Apr 1, 2016 including Hoshangabad in MP and initial feedback
has been quite positive from the users there. However, we will have to wait
for the complete implementation of DBT to assess its full impact.
Improvement in beneficiary targeting under
Direct Cash (account) transfer schemes
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 28
Box 9: Financial inclusion efforts – Service centres to improve digital
inclusion
We also visited few Common Service Centres operated on franchise model by
Vakarangee in Maharashtra, UP and Madhya Pradesh. Common Service
centres were envisaged as part of improving delivery of Government services
across rural India. The centres we visited catered largely to the rural/lower
income population in urban centres.
Exhibit 44. Common Service Centres provide multiple services (banking, eGovernance, insurance, eCommerce) to the
rural population/ urban under privileged class
Service centre in a low income neighbourhood in Bhopal,
Madhya Pradesh
Service centre in Palghar district of Maharashtra
Source: Rural Safari
The key services provided through these service centres are – (a) Branch
banking services (deposits, withdrawal, other banking transactions), (b)
eGovernance (issue/update of UID cards) & other Government services, (c)
insurance and (d) online/ecommerce transaction at selected locations (in tie-
up with Amazon).
We could clearly see the positive impact these service centres are having on
the rural population. Typical users of these centres are generally
uncomfortable walking to regular bank branches, are unable to fill forms by
themselves etc. Here in these CSCs, they are assisted by the centre personnel
and given that most of the transactions are Aadhar linked, so at instances
they don’t need to fill forms.
Effective use of Aadhar (UID) definitely has the potential to bring massive
amount of rural population to formal banking channels, the green-shoots we
can see across pockets in the country.
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 29
Wealth effect of land
Land prices in India had jumped c.5-10x over the past ten years driven by
urbanization, improved road connectivity and remittances. The increasing price
trend also encouraged speculation which aided the price increase.
We had seen signs of downward pressure on land prices during our second trip
(Oct 2015) with number of transactions reducing. Our current trip (Apr 2016)
corroborated our view of continued weakness in land prices. We saw instances of
land price increases near urban areas or where new infrastructure facilities are
coming up. Barring those instances, land prices are largely stable or facing
downward pressure, with additional state specific factors at play.
Exhibit 45. Land prices have softened and transactions reduced
State Real estate
trend Comments
Madhya Pradesh Weakness in agriculture during last two years
Uttar Pradesh Number of transactions have declined significantly
Bihar Number of transactions have declined significantly
Punjab Change in land use policy (conversion from
agriculture to other usage) impacted prices
Telangana Prices increased near capital, but down outside
region
Karnataka Prices weaker in northern Karnataka
Maharashtra Weak agriculture, drought impact
Tamil Nadu Lower transactions due to state elections, prices
expected to improve post elections
Source: Rural Safari
We believe the prices are likely to remain stable even in an improving macro-
economic scenario. Efforts to increase transparency in land purchase/sales
through online registrations, increase in ready reckoner rates and other similar
efforts are also impacting land transactions.
We have seen improved propensity to consume in rural India (elasticity of rural
consumption to rural GDP increased from <0.7x pre-2009 to close to 1x in years
after 2009), which was also driven by the land price increase over the years. As
land prices stop their upward growth trajectory, we expect wealth effect to taper
and also impact consumption adversely.
Land prices stable to down in majority of areas
where we visited
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 30
Increasing indebtedness in Rural India
Rural credit growing faster than other segments: While urban credit
outstanding has slowed down in the last 5 years (12% CAGR in CY11-15 vs 24% in
CY06-10), rural credit has maintained the momentum (18% CAGR in CY11-CY15 vs
18% in CY06-10) as it continued growing at a fast pace. Eventually rural share of
overall credit has increased from 16.8% in Dec’10 to 20.3% in Dec’15. The high
growth of rural credit signifies the increasing leverage taken by rural India along
with the event of declining income levels in agri households.
As of Dec’15 total credit outstanding stood at Rs 70trn (10.9%YoY) with rural
credit standing at Rs 14trn (12.8%YoY) and urban at Rs 54trn (8.6%YoY). In FY15,
at disaggregated level, some of the fast growing segments in rural credit were
agriculture (13.2%YoY), industry (13.7%YoY), construction (28.9%YoY), trade
(8.9%YoY) and personal loans (10.4%YoY).
Exhibit 46. Flow of credit to rural economy
Growth in loans outstanding in rural and semi-urban areas
have outpaced both urban and metropolitan and overall
growth
Credit disbursements to rural India growing at faster than
urban credit on 5Yr CAGR basis
Source: CMIE, JM Financial, Rural Safari
Exhibit 47. Incidence of Indebtedness for rural households
Incidence of indebtedness is relatively higher among medium
and large landholders (over 2 hectares)
Across income decile (asset holdings), major portion of rural
loans are utilized to meet household expenditures
Source: NSSO Survey, JM Financial, Rural Safari, Lowest decile class comprises of households in the bottom 10% of asset holding based ranking
12.8%
10.4%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Jun-
04
Dec
-04
Jun-
05
Dec
-05
Jun-
06
Dec
-06
Jun-
07
Dec
-07
Jun-
08
Dec
-08
Jun-
09
Dec
-09
Jun-
10
Dec
-10
Jun-
11
Dec
-11
Jun-
12
Dec
-12
Jun-
13
Dec
-13
Jun-
14
Dec
-14
Jun-
15
Dec
-15
Total Semi Urban & Rural Urban & Metropolitan
17.9%
23.7%
17.5%
12.2%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Rural- Semi-urban SCB Credit Urban - Metropolitan SCB Credit
CY06-CY10 CY11-CY15
42%
47% 48%
56%
67%
76%79%
52%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
20,000
70,000
120,000
170,000
220,000
270,000
320,000
<0.01 0.01-0.40 0.41-1.00 1.01-2.00 2.01-4.00 4.01-10.00 >10 All-India
Avg. O/S loan % Indebted agri-households (RHS)
ha unit
0
20
40
60
80
100
1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th
Farm expenditure Non-farm expenditure Household expenditure(%)
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 31
Usage of credit and increasing indebtedness: Typically, years of bad monsoon
and/or bad cropping season have also been the years of high credit growth
explaining the constant growth in rural outstanding credit in the last 5 years. The
indebtedness increases as income decile (asset holding) rises. Average
outstanding loan of agri household stands at Rs 47,000 (NSSO survey, 2013) with
loan of higher income decile increasing to Rs 290,000. The credit availed is
primarily used for household expenditure across all income deciles. While farm
expenditure is less in lower income decile, spending of credit on farm equipment
increases for households with high land holding.
Sources of credit: According to NSSO, 19% of rural households depended on non-
institutional sources of credit as against 17.2% for institutional credit in FY12.
The dependence on former, however, increases for households with higher asset
holdings. However, with emphasis on financial inclusion, expanding bank
penetration and successful offtake under PMJDY the role of non-institutional
credit may be expected to gradually come down.
Exhibit 48. With 20% share in total loans, personal loans are growing at a robust 13% CAGR from FY10-15
Loans for consumer durables is the fastest growing segment Housing loans have the largest share in personal loans in FY15
Source: CMIE, JM Financial, Rural Safari
Lower income has increased leverage ratios among rural households: With
lower yields, lower net sown area and increasing incidence of crop failure, farm
income of an average farmer has declined in the last 2 years. Based on our survey
and NSSO data, we have estimated farm income for the past 4 years and expected
income for FY17 assuming a good monsoon (Exhibit 50 and Exhibit 52). We
estimate farm income for an average farmer (land holding : 2.7 acres) to have
fallen 7% in FY15 and 7% in FY16 even as non-farm income compensates by
pushing the overall income growth to 2% in FY15 and neutral in FY16. Since MSP
prices were low and wage growth was high, farm income was also affected in
FY14 (de-growth of 1%YoY). With the assumption of a good monsoon providing
better yields, we predict farm income to grow at 20% as total income grows at
12%YoY.
As seen in Exhibit 50, we estimate the surplus for an average household (revenue-
expenditure) to have dropped post FY13. With increasing deficit for an average
farmer, requirement of debt would have increased and we estimate debt/asset
ratio to have increased from 7.5% in FY14 to 9.8% in FY16. Pressure on land
prices have also contributed adversely to increasing the ratio. The falling income
levels have also resulted in the need for borrowing more due to consumption and
income mismatch. With an average interest rate at 12%, we estimate
interest/income ratio to have risen from 8.0% in FY13 to 9.0% in FY16. Both
leverage ratios indicate the leverage increase in farmer balance sheet.
18.4%
13.7%
15.5%14.8%
10.5%
6.0%
10.0%
14.0%
18.0%
22.0%
ConsumerDurables
Housing Vehicles Education Others
2.3%
45.1%
10.5%
10.9%
31.2%
Consumer Durables Housing Vehicles Education Others
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 32
Exhibit 49. Weak base and good monsoon are expected to support income growth and help repair rural balance sheet
Agri income is expected to rise as non-agri remains
“supportive” for total income growth
Weak income levels have affected the balance sheet of farmers
Source: CMIE, JM Financial, Rural Safari
Exhibit 50. Income calculations for an average farmer
FY13 FY14 FY15 FY16 FY17E Assumptions
Average Land Holding Acres 2.7 2.7 2.7 2.7 2.7 NSSO 68th round, Avg land holding: 1.1 ha
Cost of Land Rs 270,758 297,834 282,942 254,648 254,648 Value of land from NSSO Survey & assumptions
Land Value Rs 731,047 804,152 763,944 687,550 687,550
Kharif Crop - Rice
Adjustment of net crop
sown area (x) 0.70 0.70 0.68 0.65 0.70
Initial assumption to adjust income to NSSO
survey. Varied based on yearly net sown area
Productivity (qtl/acre) 14.9 14.6 14.1 13.8 14.2 Calculated as ratio of sown area & production
Price MSP - Rs 1,280 1,345 1,400 1,450 1,523 MSP price till FY16, JMFe for FY17
Revenue from crop Rs 13,320 13,741 13,402 13,004 15,167
Byproduct Rs 1,127 1,194 1,182 1,101 1,194 Value of byproduct for planting the crop
Cost Rs 6,763 7,563 7,801 7,823 8,873 Cost assumptions based on NSSO survey & WPI
Rabi Crop - Wheat
Adjustment of net crop
sown area (x) 0.70 0.70 0.68 0.65 0.70
Initial assumption to adjust income to NSSO
survey. Varied based on yearly net sown area
Productivity (qtl/acre) 12.6 12.7 12.1 11.7 12.3 Calculated as ratio of sown area & production
Price MSP - Rs 1,350 1,400 1,450 1,525 1,601 MSP price till FY16, JMFe for FY17
Revenue Rs 11,918 12,474 11,906 11,611 13,805
Byproduct Rs 2,578 2,732 2,703 2,170 2,380 Value of byproduct for planting the crop
Cost Rs 5,630 6,189 6,084 5,866 6,573 Cost assumptions based on NSSO survey & WPI
Annual agri Income Rs 44,687 44,252 41,331 38,335 46,168
% of Non-agri Income (%) 46% 50% 54% 57% 54%
Wages Rs 20,736 24,883 28,616 30,762 32,300 Rural wage growth from CMIE
Farming of animals Rs 9,816 10,994 11,654 11,887 12,481 NDDB release on value of livestock
Others Rs 7,116 7,828 8,454 8,876 9,764 JMF Estimate
Non-agri Income Rs 37,668 43,705 48,723 51,525 54,545
Total Income Rs 82,355 87,956 90,054 89,860 100,713
Consumption Rs 77,084 84,793 89,032 90,813 97,170 NSSO survey and JMF estimate
Surplus/Deficit Rs 5,271 3,164 1,022 (953) 3,543
Average Debt Rs 54,800 60,280 63,294 66,459 70,070 NSSO Survey and JMF estimate
Additional debt Rs 0 0 0 953 0
Total Debt Rs 54,800 60,280 63,294 67,411 70,070
Debt/Asset x 7.5% 7.5% 8.3% 9.8% 10.2%
Debt/Income x 66.5% 68.5% 70.3% 75.0% 69.6%
Interest x 6,576 7,234 7,595 8,089 8,408
Interest / income x 8.0% 8.2% 8.4% 9.0% 8.3%
Source: JM Financial
An average farmer gets some relief from non-farm income as the share of non-
farm income (~50% of total income) is high. But for a large farmer, the cultivation
is much higher than non-farm income (only 20% of total). Hence, weak monsoon
have deeply affected the income levels of large farmers. We estimate total income
-1%
16%
7%
-7%
11%
2%
-7%
6%
0%
20%
6%
12%
-10%
-5%
0%
5%
10%
15%
20%
25%
Agri income growth Non-Agri income growth Total income growth
FY14 FY15 FY16 FY17E(%)
7.5% 7.5%
8.3%
9.8%
10.2%
8.0% 8.2%
8.4%
9.0%
8.3%
6%
7%
8%
9%
10%
11%
FY13 FY14 FY15 FY16 FY17E
Debt/Asset Interest / income(%)
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 33
to have decreased by 3% in FY15 and by 4% in FY16. But with a better monsoon,
the income levels of the farmer can increase by 17%.
With falling incomes, savings of a large farmer would have dropped. Based on our
calculations, we estimate debt/asset ratio to increase from 4.5% in FY14 to 5.9%
in FY16 while interest/income increases from 7.3% in FY13 to 9.5% in FY16.
Exhibit 51. Higher agri income to provide relief to depleting savings of a large farmer
Due to higher share of agri income, total income for a large farmer will
increase higher than average farmer
Weak income levels have affected the balance sheet of farmers
Source: CMIE, JM Financial, Rural Safari
Exhibit 52. Income calculations for a large farmer
FY13 FY14 FY15 FY16 FY17E Assumptions
Average Land Holding Acres 15.0 15.0 15.0 15.0 15.0
Cost of Land Rs 270,758 297,834 282,942 254,648 254,648 Value of land from NSSO Survey & assumptions
Land Value Rs 4,061,372 4,467,509 4,244,134 3,819,721 3,819,721
Kharif Crop - Rice
Adjustment of net crop
sown area (x) 0.70 0.70 0.68 0.65 0.70
Initial assumption to adjust income to NSSO
survey. Varied based on yearly net sown area
Productivity (qtl/acre) 14.9 14.6 14.1 13.8 14.2 Calculated as ratio of sown area & production
Price MSP - Rs 1,280 1,345 1,400 1,450 1,523 MSP price till FY16, JMFe for FY17
Revenue from crop Rs 13,320 13,741 13,402 13,004 15,167
Byproduct Rs 1,127 1,194 1,182 1,101 1,194 Value of byproduct for planting the crop
Cost Rs 6,763 7,563 7,801 7,823 8,873 Cost assumptions based on NSSO survey & WPI
Rabi Crop - Wheat
Adjustment of net crop
sown area (x) 0.70 0.70 0.68 0.65 0.70
Initial assumption to adjust income to NSSO
survey. Varied based on yearly net sown area
Productivity (qtl/acre) 12.6 12.7 12.1 11.7 12.3 Calculated as ratio of sown area & production
Price MSP - Rs 1,350 1,400 1,450 1,525 1,601 MSP price till FY16, JMFe for FY17
Revenue Rs 11,918 12,474 11,906 11,611 13,805
Byproduct Rs 2,578 2,732 2,703 2,170 2,380 Value of byproduct for planting the crop
Cost Rs 5,630 6,189 6,084 5,866 6,573 Cost assumptions based on NSSO survey & WPI
Annual agri Income Rs 248,261 245,842 229,617 212,973 256,490
% of Non-agri Income (%) 18% 20% 23% 25% 23%
Wages Rs 24,372 29,246 33,633 36,156 37,964 Rural wage growth from CMIE
Farming of animals Rs 18,012 20,173 21,384 21,812 22,902 NDDB release on value of livestock
Others Rs 10,332 11,365 12,274 12,888 14,177 JMF Estimate
Non-agri Income Rs 52,716 60,785 67,292 70,856 75,043
Total Income Rs 300,977 306,627 296,909 283,829 331,533
Consumption Rs 225,733 252,820 271,782 285,371 308,201 NSSO survey and JMF estimate
Surplus/Deficit Rs 75,244 53,807 25,127 (1,542) 23,332
Average Debt Rs 184,000 202,400 212,520 223,146 242,540 NSSO Survey and JMF estimate
Additional debt Rs 0 0 0 1,542 0
Total Debt Rs 184,000 202,400 212,520 224,688 242,540
Debt/Asset x 4.5% 4.5% 5.0% 5.9% 6.3%
Debt/Income x 61.1% 66.0% 71.6% 79.2% 73.2%
Interest x 22,080 24,288 25,502 26,963 29,105
Interest / income x 7.3% 7.9% 8.6% 9.5% 8.8%
Source: JM Financial
-1%
15%
2%
-7%
11%
-3%
-7%
5%
-4%
20%
6%
17%
-10%
-5%
0%
5%
10%
15%
20%
25%
Agri income growth Non-Agri income growth Total income growth
FY14 FY15 FY16 FY17E(%)
4.5% 4.5%
5.0%
5.9%
6.5%
7.3%
7.9%
8.6%
9.5%
8.9%
4%
5%
6%
7%
8%
9%
10%
FY13 FY14 FY15 FY16 FY17E
Debt/Asset Interest / income(%)
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 34
Deleveraging and small ticket purchases to take
front stage
With farmer income taking a hit in the past 2 years and based on our survey
it is evident that consumption of essentials, frequency of consumption (lower
end farmer) and impulsive purchases (average farmer) have come down. With
lower income, we also estimate the debt level to have increased and savings
level to have declined for the farmers. Hence, we expect the savings from the
initial crop to be utilized for deleveraging exercise and increasing purchases
of small ticket items. Consumer durables and other large ticket purchases
would take time as we believe farmer will look into building their savings as
it has been vanquished in the past 2 years. We are playing the theme of
deleveraging and small ticket purchases in our model portfolio through
Mahindra Finance and Hero Motocorp.
Falling land prices could constrain propensity to consume: During the last
decade, elasticity of consumption rose fast in Rural India as land prices were
increasing and provided support. But with land prices coming under pressure, we
expect the elasticity to fall less than 1 in the short term. With lower elasticity, an
increase in income may not completely transfer into consumption.
Exhibit 53. Elasticity could be under pressure due to fallen land prices
Source: NSSO, JM Financial
With fall in income levels and due to possible deficit post consumption, we
estimate debt levels and savings of farmer to have been impacted negatively over
the past 3 years. The leveraged balance sheet would also reduce elasticity and
people’s propensity to consume. We expect farmers to undergo deleveraging
exercise to bring down the debt to comfortable levels before opting for big ticket
purchases. Based on our calculations savings from the initial crops could go
either towards deleveraging the balance sheet or building savings that has been
depleted in the previous years.
In our examples, post consumption we estimate debt/asset of an average farmer
to drop by 0.5% while the ratio for large farmer would be 0.6%. Hence an average
farmer would need 2-3 successful crops to deleverage completely and hit back to
high consumption pattern.
6.4
10.7
17.4
11.6
13.6
17.6
0.6
0.8
1.0
0.0
0.2
0.4
0.6
0.8
1.0
1.2
0
4
8
12
16
20
FY94-05 FY05-10 FY10-12
MPCE Rural per capita GDP Multiplier (RHS) (x)(% CAGR)
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 35
Exhibit 54. Given the high leverage, we expect building up savings and deleveraging to be the first activity
De-leveraging by the average farmer De-leveraging by the larger farmer
Source: CMIE, JM Financial, Rural Safari
Small ticket purchases would dominate the big ticket purchases: With decline
in income, consumption capacity of Rural India has come down in the past 2
years. It is evident from our survey that impulse purchases have dropped with
essentials also taking a hit among below average farmers. The frequency of
consumption of both impulse (average farmer) and essentials (below average)
have dropped in the last 2 years. The drop in consumption is evident in volume
growth numbers of rural oriented companies as shown in Exhibit 58. With good
monsoon and higher income, we expect small ticket items and regular
consumables to take primary stand.
Exhibit 55. Lower income in the past 3 years has affected consumption in Rural India
Reduction in frequency of consumption and delay in
purchasing is evident in weak volume growth of rural stocks
Good monsoon plays a crucial part in increasing rural
consumption
Source: CMIE, JM Financial, Rural Safari
Positioning the portfolio for deleveraging and small ticket items: We prefer to
play the initial stage of a rural recovery through Mahindra Finance (improvement
in recoveries and NIM expansion to lead to strong 30% EPS CAGR over FY16-18E)
and Hero Motocorp (upside risks to earnings on the back of increase in volume
growth).
7.5%
8.3%
9.8% 9.7%
0.5%
6%
7%
8%
9%
10%
11%
FY14 FY15 FY16 FY17E
Debt/Asset(%)
4.5%
5.0%
5.9% 5.7%
0.6%
4%
5%
6%
7%
FY14 FY15 FY16 FY17E
Debt/Asset(%)
(40)
(20)
0
20
40
60
1QFY10 1QFY11 1QFY12 1QFY13 1QFY14 1QFY15 1QFY16
HUL 2W Tractor(%)Monsoon Rural Credit Growth Tractor Volume Growth 2W Volume Growth
CY05
CY06
CY07
CY08
CY09 Loan Waiver Scheme Loan Waiver Scheme
CY10 1st year of New Govt.
6th pay commission
1st year of New Govt.
6th pay commission
CY11
CY12
CY13
CY14
CY15
Good Moderate Bad
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 36
Box 10: Mr Nitin Shelke represents a middle class consumer in
Marathwada region
• Lives with his parents, wife and two children.
• Owns 14 acres of land and works as a teacher in a nearby school.
• Owns a car and a bike though does not have an air-conditioner at home.
• Has seen >50% decline in crop yields in his farm this year and has also been
forced to reduce spends on daily essentials (such as no. of times/day of tea
reduced from 4 to 2, less number of chocolates for kids) this year.
• In case of a better monsoon this year, he would apply his incremental
income on reducing the debt burden taken to finance crop losses.
Exhibit 56. With a medium farmer (14 acres) in Marathwada region
Source: Rural Safari
Farm income decline has led to reduction in
staples and small ticket consumption as well
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 37
Some observations from our trip...
Exhibit 57. Around our trips
A farmer in Mysore – Non-farm income support through
tractor rental income A familiar scene outside most of towns/cities
Source: Rural Safari
Box 11: Social venture also aiding rural income in select pockets
We also interacted with social entrepreneurs whose venture have aided in
improving income of villagers on a sustainable basis. One such example is a
company called Grass Routes which operates community managed rural
tourism.
The company at present has operations in 10 villages and typically choses
villages with 40-300 households. Each of the village they have chosen has
majority of population below poverty line.
In terms of impact, at Purushwadi, one village in Ahmednagar district of
Maharashtra, average house-hold income was c.Rs12-14,000 per annum
during 2006, which has now almost trebled to Rs35-40,000 per annum. The
increase in income has been on account of – (a) additional revenues from
tourism, (b) better irrigation facility leading to yield improvement from
farming as well.
Purushwadi has 109 house-holds and now more than 50 household are
engaged in tourism. Primarily women and youth are involved, with women
trained as cooks and youths as guides and house-keeper. The whole process
of preparing a village for tourism takes at least a year and afterwards, a
village committee manages the whole process.
For each batch of 4-5 tourists, there are six villagers who get involved – 2 act
as guide, 2 for food and 2 work on cleaning and other associated activities.
Apart from increase in income, Purushwadi has also seen improvement in
education level and aspiration of their young population.
3x increase in average house-hold income over
past six years, improvement in education and
aspiration levels of youth
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 38
Sector Comments
Consumer Goods
Our recent rural trip has confirmed that poor monsoon have, indeed,
adversely impacted rural incomes and thus consumer sentiment. Overall we
have drawn three broad conclusions, 1) Incomes from farm activity have
declined in most regions leading to an increased debt burden for famers
though some regions have witnessed higher non-farm incomes partially
negating the fall, 2) General trade stores in most areas have witnessed
flattish to sharp double-digit decline in revenues, 3) Consumer demand for
Ayurvedic products (including Patanjali, Kesh King and Himalaya) have
increased sharply in recent months. Rural demand revival (assuming a good
monsoon year), however, could be more gradual, in our view, as most
farmers would initially apply their incomes towards reducing debt. While
revenue growth is expected to benefit from rural demand recovery and price
hikes, the recovery appears to be largely factored in consensus estimates.
Risk of RM’s being highly inflationary and adversely impacting margin
remains in FY17. High valuations (at c.38x for consumer sector ex-ITC)
would also constrict upside in near-term, in our view.
Reduction in farm incomes has impacted consumption: Poor monsoon has
resulted in lower crop yields as well as lower net sown area adversely impacting
farm incomes. Coupled with this, some regions have also witnessed erratic
weather patterns resulting in crop failures. However, non-farm income has
steadily increased driven by recent pick-up in MGNREGA spending (up 17% in
FY16), rural based development (road construction) and sand mining resuming in
certain regions. This has partially cushioned decline in incomes for people in
rural areas. As overall incomes have declined (especially for large farmers with
higher proportion of farm income), this has led to a sharp deceleration in rural
growth for consumer products.
Exhibit 58. Dry agricultural lands in Marathwada region on poor water
availability leading to sharp decline in agri-income
Source: Rural Safari
Despite expectations of improving rural incomes, rural demand recovery
could be more gradual: As per our inferences from conversations with farmers,
their debt burden appears to have increased substantially which is attributable to
either lower crop yields/poor quality or crop failures on erratic weather patterns.
Reduction in farm income during past two years
has impacted consumption across categories
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 39
Farmers have, though, diversified their income sources which have helped them
sustain during these adverse times.
As we progress, there is an expectation of good monsoon this year which is
expected to aid in substantially improving rural income. However, given higher
debt burden and recent experience of volatility in weather patterns, farmers are
expected to be more cautious in their expenditures and incremental income is
expected to be first applied towards repayment of debt. Also price hikes on
higher raw material prices could impact volume growth recovery for consumer
companies. Hence we expect overall demand recovery to be more gradual in
FY17.
General trade stores witnessing sharp declines; Ayurvedic products though
performing well: We visited a few rural general trade stores in the regions we
covered in our recent rural trip. In most regions, these stores are witnessing
flattish to single-digit decline in their revenues on decline in incomes. Our survey
reveals that consumers have reduced their household budget by either reducing
frequency of usage of consumer products (for non-premium products) or down-
trading (implies consumers who use both premium and non-premium brands
have now altogether shifted to non-premium brands).
Furthermore, there is also a clear trend of consumer preferences tilting towards
Ayurvedic products. Ayurvedic brands that have witnessed increased popularity
includes Kesh King (Emami), Patanjali, and also Himalaya. While Patanjali
products were competitively priced, Kesh King has gained popularity despite
higher pricing as consumers have found the products to be effective.
Exhibit 59. Ayurvedic brands like Kesh King seeing traction in rural areas; Horlicks, Bournvita, while present in rural
stores, are seeing very low demand at present
Horlicks Sachets on display at a rural general trade outlet Increased traction of ayurvedic brands in rural areas
Source: Rural Safari
Patanjali seeing traction in rural areas as well; some contradictory views
also present: We also visited Patanjali stores to understand the acceptance level
for its products in rural regions. Based on our conversations, Patanjali products
appear to have definitely outperformed other consumer brands in that region,
though pace of outperformance appears lower than in urban centres. Our
conversations with the consumers based in those regions have given some
contradictory views like:
Most products used by rural farmers are either homemade (e.g. Ghee)
or derived from nature, hence fascination for Patanjali is not as high
amongst rural consumers.
Ayurvedic products are seeing increased
traction; even in certain rural areas
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 40
Some of the Patanjali products like atta (wheat flour) and sugar are not
cheap when compared to the prices that the rural consumers are used
to paying for these products.
Also, there are other Ayurvedic brands like Kesh King and even Himalaya that
are gaining higher consumer acceptance. Given lower level of awe for
Patanjali in these regions, scaling-up presence in rural areas could be a
challenge.
Exhibit 60. Pantanjali products availability being advertised by medical
stores
Source: Rural Safari
Price hikes to aid revenue growth; margin expected to be maintained: Given
expectations of La Nina prevailing in FY17, raw material price inflation could
return as discussed earlier section of this report. Our consumer raw material
index has witnessed an uptick recently led by inflation in palm-oil, PFAD, sugar
and crude prices. This implies FY17 could be in complete contrast to FY16
(margin expansion driven earnings growth) for most consumer companies and
revenue growth would be the key driver for earnings. We are expecting revenue
growth to recover on higher realizations and improved volume growth based on
the assumption of FY17 witnessing a good monsoon.
Structural story led by penetration and higher usage remains intact:
Structural story for rural consumption driven by higher rural incomes and high
penetration opportunity remain intact. Rural consumer aspirations have
developed though stress on farm incomes has impacted purchasing power in
recent times. For eg. Health Food Drink brands like Horlicks and Bournvita have
witnessed decline in sales in some rural stores as they are quite expensive.
Similarly many rural consumers have not purchased durables like washing
machines and air-conditioners while even LCD penetration appears very limited.
However, what surprised us was that frequency of painting was much higher for
rural farmers relative to their urban counterpart. As per our survey, as the
income levels increase, most rural farmers resort to higher frequency of
repainting which augurs well for paints demand.
Aspiration level remains high in rural India. Due
to La Nina impact, raw material price inflation
can return
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 41
Exhibit 61. High aspirations for improved exteriors in rural areas to aid
demand for paints
Source: Rural Safari
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 42
Automobiles
Our latest trip across rural hinterlands over the past few weeks (3rd
‘Rural
Safari’ series, 2016) brought to light relatively subdued demand
environment across various consumer discretionary items. During this trip
that coincided with the Rabi season FY16, we observed rural economy to be
impacted by a) unseasonal rainfall (although far less impactful) in parts of
northern India b) lack of proper irrigation facilities in some parts c) price
volatility in certain non-MSP crops (vegetables) d) slowing
momentum/decline in land prices impacting the wealth effect that was seen
earlier. We are not very buoyant on immediate strong recovery given a) 3
consecutive crop failures leading to depletion of savings and increased
indebtedness that would take time to repair b) no sustainable trends
witnessed in construction activities c) subdued sentiments. Consequently
we believe, rural demand for PV is expected to take more time to pick pace
while 2 wheelers being of relatively smaller ticket size may see an uptick on
good monsoons and relatively better Kharif crop. Tractor demand after 2
consecutive years of decline would see some growth largely on weak base
contingent on good monsoons.
Having said that, our trip reassures our belief in the long-term demand
potential and growth drivers of automobiles in the rural/semi-urban India.
As farm mechanization increasingly picks pace, we expect tractor volumes
to grow at a healthy clip over medium-long term. Similarly, given the
structural drivers (like greater aspirations, growing income, better
infrastructure, and lower penetration) in place, we see strong growth
opportunities for both PV and 2-wheeler players. Further, our interaction
with auto companies indicate that they continue to focus on
distribution/marketing set-up in the rural India, highlighting their
commitment to the opportunity called ‘Rural India’.
Exhibit 62. Auto Growth rates over the years
Source: SIAM
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 43
Two Wheelers
2-wheelers demand remains subdued after a good festive season in 3QFY16:
2-wheelers continue to be the mainstay for transport in rural/semi urban India.
During our travel across the rural hinterlands, we observed that festive season in
3QFY16 saw a healthy demand pick-up. Keeping up with the customer
sentiments, OEM’s led by Hero Motocorp (HMCL) launched new models/variants.
For example, HMCL launched two new models in the scooters segment such as
‘Maestro Edge’ and ‘Duet’. Bajaj Auto launched ‘Avenger Street 150’ and
upgraded variant of ‘Avenger 220’. These resulted in domestic industry sales of
2 wheelers growing c.8%YoY in Oct-Dec’15 with market leader HMCL growing at
8.5%YoY.
Post the festive season, however demand turned soft with Dec-Jan’16 2-wheeler
demand declining 3%YoY. Our conversations with dealers indicate that overall
demand has softened post festive season on the back of agrarian distress
impacted by third consecutive crop failure due to monsoon deficit.
Exhibit 63. 2 wheeler penetration – Hero remains ubiquitous
Hero extension counter in rural Marathwada region
Hero Splendor and Passion remain popular in tier 3
towns
Source:JM Financial
Strong marriage season to drive demand in 1QFY17: With upcoming marriage
season, gifting would increase leading to improved 2 wheeler demand. We saw a
precursor of possible demand pick-up in Mar’16 (c.11%YoY). Our dealer checks
indicate that wedding season in Apr-May’16 would lead to demand pick-up in
1QFY17.
Scooters continue gaining traction: Scooters continue its robust growth within
2 wheelers. At the industry level, scooters registered c.12%YoY in FY16
compared to largely flattish motorcycle demand. Scooters currently occupy c.25-
30% of the total 2 wheeler demand in many tier-3 towns as against c.10-15% in
villages. At the industry level, scooters constituted c.31% of the total two wheeler
sales in FY16 Vs c.15.5% of domestic 2 wheelers in FY10. Although we believe
scooters will continue to outperform 2 wheelers and occupy a bigger share of the
2 wheeler market, in-line with global trends, villages and smaller towns will take
more time to catch up with this scooterisation trend in the medium-term. Hero
Motocorps new scooters ‘Maestro Edge’ and ‘Duet’ are seeing healthy traction in
all places we visited. Further there are no discounts on HMCL’s scooters.
FY16 saw a subdued 2 wheeler demand even as
scooters continued to gain traction
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 44
Exhibit 64. Increasing scooter penetration – Hero’s newly launched scooters well received in the market
Hero Maestro Edge Hero Duet
Source: JM Financial
Rising 2 wheeler financing penetration: Increasingly more customers are
opting for financing over cash purchases in semi-urban areas. The current
penetration is at c.40% and in some areas even more than that. In case of Hero
Motocorp, captive financing from Hero Fincorp is gaining traction, in all the
places we visited. Hero Fincorp is also setting increasingly aggressive credit
growth targets for its employees and rolling out attractive financing schemes on
select models in select markets. Given the up-cycle in 2 wheelers, Hero Fincorp
would benefit from a) increasing volumes b) increasing financing penetration on
the back of declining interest rates c) increasing customer awareness and risk
taking ability and d) gaining market share from other financiers.
Royal Enfield continues to remain ‘aspirational’: Ever since our first rural
safari, we have been observing that Royal Enfield is a strong aspirational
purchase even in tier 3 towns. In-line with the trends in urban areas, we saw
rising traction for RE and a strong desire to own a RE. With economy segment
already well penetrated, our discussions indicated a desire to move to higher
capacities in smaller cities. Within the higher capacity bikes, RE is the only bike
with top-of-the-mind recall due to a) cult brand status b) all metal body while
bigger bikes from many competitors make use of plastic panels. In terms of
immediate competition, like Harley Davidson, network and initial set-up costs
would remain their biggest handicaps.
Black money flow in the system seems to have been curtailed and the same has
affected RE demand in select areas. The recently launched 400 cc bike
‘Himalayan’ created quite some excitement, given the premium ‘adventure
tourer’ positioning, we would have to see if the excitement translates into actual
sales numbers.
Honda motorcycles unable to create excitement: While Honda continues to
remain the market leader in scooters with c.55% market share, they are
struggling to gain market share in motorcycles and their performance in
motorcycles has been far below industry growth. Honda continues to lag industry
despite product quality being on par or slightly better than competition in terms
of technology, design and style elements. During our interactions, we observed
that while ‘Hero’ brand was well entrenched in the minds of buyers, Honda is
way behind in gaining customer mind share. In FY16, at industry level, Honda
domestic motorcycles declined c.15% YoY compared to relatively flat industry
volumes.
Easier access to vehicle finance in rural sector
has led to increased financing penetration
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 45
Passenger Vehicles
Overall demand remains soft but in positive territory: Passenger vehicles
grew at a relatively soft pace of 7.5%YoY largely due to rural slowdown. Although
industry leader MSIL reported domestic growth of c.11.5%YoY, rural sales
languished at a mere 9% compared to 22%YoY in FY15 largely due to three
consecutive crop failures. While IMD has forecasted 2016 monsoon at 106% of
the long period average, we expect overall rural passenger demand to remain
soft in the near future. Being high ticket purchase, rural demand for PV is
unlikely to stage a strong comeback even in the event of slightly better
monsoons as a) farmers indebtedness has steadily increased on the back of
agrarian distress b) cash flows in the system are yet to recover meaningfully c)
newer models that are being launched are more attuned to semi-urban than
villages d) black money flow has been curbed in many places.
Exhibit 65. Maruti Suzuki and Hyundai remain the most popular choices in semi-urban/tier 3 towns
Source: JM Financial, Rural Safari
New launches well received in tier 3 towns: New launches from Maruti Suzuki
(‘Vitara Brezza’, ‘Baleno’) and Mahindra and Mahindra (‘TUV300’, ‘KUV100’) have
been well received in tier 3 towns. Maruti ‘Alto’ and ‘Swift’ continue to be the
preferred choice in the segment. In parts of Punjab, ‘Swift’ was a usual marriage
gift amongst relatively wealthy farmers.
During our interaction with auto dealers in tier 3 towns and beyond, we
understood ‘KUV100’ still has a waiting period of 6-8 weeks due to supply
constraints and bookings are growing at a healthy pace. Mahindra UV models
enjoy relatively higher brand recall in tier 3 towns despite the slowdown in key
models (such as ‘Bolero’). However, dealers are not yet sure of the impact of
‘Vitara Brezza’ on the demand for Mahindra ‘TUV300’/’KUV100’. Amongst the
UV’s, Hyundai’s ‘Creta’ is very popular in semi urban areas and has a waiting
period of 3-4 months.
Being high ticket purchase, rural demand for PV
is unlikely to stage a strong comeback in the
near future.
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 46
Exhibit 66. New launches from Mahindra and Mahindra have been well received
Mahindra & Mahindra Automobile Showroom in Varanasi Sales volumes of new TUV300 + KUV100
Source:JM Financial
Q3FY16 festivals were better than expectations: Our discussions suggest that
festival demand in Q3FY16 was relatively better than expectations across
multiple places. We believe his may be partly because expectations were reset
and were at all-time low post agrarian failures. Post the festival season, Feb-
Mar’16 saw PV demand soften at c.3%YoY compared to the full year growth at
7.5%YoY.
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
Sep 2015 Oct 2015 Nov 2015 Dec 2015 Jan 2016 Feb 2016 Mar 2016
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 47
Tractors
Tractor demand remains weak with hope of better outlook on good
monsoons: Tractor sales continue to remain weak due to agri stress caused by
back-to-back monsoon failures (Monsoon deficit: -12% FY15/-14% FY16).
Domestic tractor industry volumes declined 13%/10.5% YoY in FY15/FY16 on
account of 3 consecutive crop failures. Demand slump was exacerbated by sharp
decline in income levels of farmers due to crop failures even as non-farm income
growth remained sluggish. We observed changing crop patterns in certain
locations, with farmers shifting towards cash crops like vegetables since
traditional crops like paddy demand standing water. This, in turn, impacted
tractor usage as vegetable farming requires lower tractor usage.
While agri demand for tractors experienced a severe slowdown, it is the
delayed/non-recovery in rural/semi-urban commercial segment demand that
worries us even more. In a few states like MP/Punjab, partial restart of mining
has given some respite from the sharp slowdown even as decline in diesel prices
has improved profitability for tractor owners (especially who rent it out).
Exhibit 67. Tractor volumes have declined sharply in FY15 and FY16
Tractor volume trend Domestic Market share (FY16)
Source: Crisil, JM Financial
Tractor demand largely monsoon dependent in many markets: Long term
tractor demand remains intact; however in the near-term tractor demand still
remains monsoon dependent given that 53% of the cropped area is dependent
on monsoons. We expect tractor demand to remain weak in the immediate term
due to a) Rabi crop in FY16 being weak in most parts of the country b) soft
commodity prices c) no significant pick-up in other commercial activities d)
subdued sentiments. We believe a fairly good monsoon and more than one
healthy harvest is required for tractor demand to pick-up meaningfully. During a
recent analyst interaction, industry leader M&M (c.40% market share) indicated
that the company expects only 10% growth for tractors in FY17 on a very weak
base while maintaining avg. long term growth at 6-7%. M&M targets to gain
market share on the back of new launches (such as ‘Yuvo’ series) in the 30-45 HP
segment, like it did in FY16 when it gained c.90bps in tractor market share.
Increasing levels of mechanization: Farm mechanization in India is much lower
than the prevailing levels in developed countries and is the lowest among BRIC
nations. The key reasons are a) higher capital cost of implements compared to
manual labor b) lack of skill required to operate the machinery c) fragmented
land holdings prevent optimum utilization of mechanization. However the spatial
variation across the country reveals varying degrees of usage of farm equipment.
1%
32%
20%
11%
-2%
20%
-13%-10%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16
Domestic Tractor Volume change (%YoY)
Tafe, 23%
M&M, 41%
International Tractors, 12%
Escorts, 10%
Others, 13%
Tractor demand may pick up on the back of good
monsoon from a very weak base
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 48
Typically farm operations requiring high power inputs and low control are
mechanized first since any power intensive, low control work can be done faster
and more efficiently using mechanical means and at a lower cost whereas the
operations requiring greater degree of control would typically higher capital
costs.
Exhibit 68. Variation in levels of mechanization
Source: FICCI
Punjab, Haryana and western Uttaranchal are major states where farm
mechanization is higher and has resulted in productivity gains. Uttar Pradesh and
Bihar are just beginning to adopt mechanization whereas west Bengal, Orissa and
North east are yet to see meaningful adoption.
a. Typical farm equipment
Exhibit 69. Typically used farm equipment
Source: FICCI
In agriculture, mechanization levels are highest in land preparation (tractors,
levelers, etc.) and harvesting. In other activities the level of mechanization is yet
to reach a meaningful scale. It also varies based on the crop type.
The degree of farm mechanization varies
significantly across Indian states with Punjab,
Haryana and western Uttaranchal leading the
way
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 49
b. Crop wise utilization of farm equipment
Some crops are more amenable to mechanization than others. It also varies
based on the regional disparities as observed earlier. As can be seen from the
below exhibit, optimum mechanization (75-90%) is used across most key crops
in the land preparation stage. In wheat, farm implements are used both in
planting and harvesting to c.40% whereas it is much lower for other crops.
Exhibit 70. Crop wise utilization of farm implements
Source: Mahindra and Mahindra, JM Financial
c. Farm implements used for different crops
During our visits in Punjab, we observed that almost every medium-large farmer
used mechanization at various stages of agriculture. While tractors (ploughing)
were the most commonly used farm equipment, combine harvester and seeding
machines were also used by large farmers to improve cost efficiency and
productivity.
Exhibit 71. Farm Implements
Farm implements that can be used in Rice Farm implements that can be used in Sugarcane
Source Mahindra and Mahindra, JM Financial
90
85
95
95
75
5
5
3
45
2
3
2
2
5
13
5
0
2
40
25
0 20 40 60 80 100 120 140 160 180 200
Corn
Cotton
Sugarcane
Wheat
Rice
Land Preparation Planting Crop care Harvesting
India Strategy – Rural Safari - III 4 May 2016
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At an all India level, other factors driving mechanization include a) MGNREGA
scheme pulling labor away from agriculture b) shift into other non-farm (Services)
sector for better working conditions c) increasing urbanization and migration of
villagers.
Box 12: Farm implements
We met a farmer in a village “Tharan Tharan” on the outskirts of Amritsar. He
owned 20 acres of land and had leased out an additional 25 acres. He cultivated
wheat on 20 acres of land and vegetables (largely potato) on the remaining 25
acres of leased land. While wheat prices have largely remained stable, potato
prices fluctuate depending on market prices. While land rentals per acre are
currently between 42-45k p.a, short duration high margin crops such as
vegetables are key to maintain profitability. He owns 2 Mahindra tractors and a
few farm implements.
What is a Rotavator?
The Rotavator or the Rotary tiller produces a fine seed bed with one or two
passes before and after rain. It is a one-pass Agriculture implement which is
used for the purpose of land preparation in the agriculture fields. It is most
suitable for the removal of stubble sugarcane, wheat, banana, cotton. It retains
soil moisture and increases soil porosity and aeration, which enhance
germination and growth of crops. It is more popular for use in cultivation of
vegetables.
Key advantages
Savings in fuel expenses due to one pass stubble removal and soil
preparation
Soil moisture of previous crop does not go waste
Suitable to use in dry as well as wet land cultivation as well as for
loosening and aerating soil.
Prepares seed bed quickly and economically.
Exhibit 72. Rotavator or Rotary Tiller
Source: Rural Safari
He also owns a seed planter machine. The seeds are planted uniformly thereby
ensuring adequate but enough separation between plants. This leads to an
increase in crop density and yield.
Exhibit 73. Seeding machine
Source: Rural Safari
India Strategy – Rural Safari - III 4 May 2016
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Rural NBFC – Pick up in Govt. spending and good
monsoon could lead to strong recovery
We visited MMFS’ and other financier’s branches during our recent rural trip.
Our interaction with branch personnel, dealers and customers indicate
mixed sentiments across regions. While sentiments have improved in
regions like Punjab and Telangana due to a) increase in Govt spending b)
improved outlook for Rabi crop and c) limited impact of unseasonal rainfall
in Punjab; while in regions like Karnataka and Maharashtra the overall
sentiment remained weak due to a) poor monsoon and erratic weather
patterns and b) weakness in non-farm income due to lack of infra activities
in these regions. Three out of the four MMFS regions visited witnessed
improvement in collection efficiencies YoY as on the back of improved
customer cash flow owing to pre-election spending and slight improvement
in crop yield YoY.
Going forward, we believe good rainfall to improve crop yields in FY17.
Further government spending in rural India coupled with pick up in infra
activities should improve non-farm income. Thus FY17 will be a year of
consolidation thereby setting the base for rural growth revival in FY18.
Takeaways from MMFS management about its performance in different
states: The last two years have been difficult for MMFS, with its gross NPLs
increasing from 3% to around 8% in FY16. It has a major presence in nine large
states, namely Uttar Pradesh, Andhra Pradesh, Bihar, Karnataka, Kerala,
Maharashtra, and Madhya Pradesh, Rajasthan, Telangana and Tamil Nadu.
According to the bank’s management team, economic growth in Andhra
Pradesh, Bihar, Rajasthan, Telangana and Uttar Pradesh has been stable over
the past 3-4 quarters mainly due to the infrastructure drive that has been
initiated by respective state governments in these regions. Madhya Pradesh
also witnessed improevement where farmers were impacted due to delayed cash
flows from their crops. In Tamil Nadu, paddy harvest was good after Pongal and
cash flows have improved due to better selling price. In Assam, coal that was
already excavated in last 8-10 months have got approval for transportation
leading to improvement in cash flows.
States like Maharashtra and Karnataka which have seen bad monsoons continue
to be under stress. While Maharashtra has witnessed good grapes and orange
crop, Marathwada is still under stress. Karnataka has had to deal with other
problems, including the mining ban and the lack of a pickup in economic
activity. A slowdown in the steel industry due to Chinese exports and low
international steel prices has impacted mining activity, which has had a knock-on
effect on the rural economy in Karnataka. In Kerala, the rural economy has been
impacted by lower rubber prices and the significant slowdown in remittances
from workers in the Middle East.
Budget proposals encouraging, Monsoon key: Several measures were
announced by the Govt. in this budget to respond to weakness in rural economy
including 1) Increase in budget outlay for NREGA schemes (11% YoY), rural
development (26.5% YoY) and agriculture and allied services (79.9% YoY), 2)
Targeting to double farmers’ earnings in 5 years via a series of measures such as
transparent procurement system, increase area under irrigation, comprehensive
crop insurance scheme, improved market access and better road connectivity.
While these measures are positive, entire impact of these would be visible only in
FY18 if monsoon turns out to be good to normal. There would be positive impact
of 7th
pay commision as well which is likely to improve its customer cash flows
Sentiments have improved in regions like Punjab
and Telangana, while it remains weak in regions
like Karnataka and Maharashtra
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 52
In the last 50 years monsoons have never failed for three consecutive years:
Two weak monsoons and three continuous crop failures have drained farmers’
savings and have severely impacted rural economy. However, in the last 50 years
monsoons have never failed for three consecutive years. IMD predicts good
monsoon this year which would mean average to above average rainfall in India.
Pickup in CV growth trend is encouraging; however tractor sales remain
sluggish: While M&HCV demand has recovered sharply (30% in FY16), LCV
volumes are still flat YoY and car volume growth has improved to 8% YoY in FY16
driven by new products. Tractor volumes however have been under pressure for
last 2 years and despite a low base; FY16 tractor sales have declined by 11% YoY,
impacted by deficient rainfall, lower crop realization, weak construction & allied
activities and changing crop patterns. Consequently MMFS tractor disbursements
have declined 9% YoY in FY16 while UV disbursements have been sluggish (3%
YoY). Car disbursement growth was however encouraging with 16% YoY.
Exhibit 74. Trend in Vehicle sales vs. disbursements – YoY%
Tractor volumes have declined sharply in last few months but
is gradually picking up
Last 2 quarters have seen positive growth in MHCV sales,
while LCV growth remains under pressure
Source: CMIE
Exhibit 75. Trend in Vehicle sales vs. disbursements – YoY%
Car volumes have declined sharply in last few months but is
gradually picking up
UV volumes have declined sharply in last few months but is
gradually picking up
Source: CMIE
Pick up in infra activities will be key growth driver for rural India:
Government has stepped up spending on infrastructure related projects sharply
by increasing allocation to roads and Rural infrastructure. The government has
proposed a total outlay of Rs1,333bn in roads including Rs190bn under Pradhan
Mantri Gram Sadak Yojana for rural roads. The increased pace of rural road
construction would be the key growth driver for rural India. Going forward, we
-40%
-20%
0%
20%
40%
60%
80%
FY10
FY11
FY12
FY13
FY14
FY15
FY16
MMFS Tractors Disbursement Industry Domestic Tractor volume
M&M Domestic Tractor volume
-40%
10%
60%
110%
160%
FY10
FY11
FY12
FY13
FY14
FY15
FY16
MMFS CV/CE Disbursement (YoY%) LCV volume (YoY%)
MHCV volume (YoY%)
-40%
-20%
0%
20%
40%
60%
80%
100%
FY10
FY11
FY12
FY13
FY14
FY15
FY16
MMFS Car disbursement (YoY%) Car volume (YoY%)
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
FY10
FY11
FY12
FY13
FY14
FY15
FY16
MMFS Auto/UV disbursement (YoY%) UV volume (YoY%)
Tractor sales remain sluggish; consequently
MMFS tractor disbursements have declined 11%
YoY
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 53
believe normal rainfall should support crop output and improve crop yields.
Further government spending in rural India coupled with pick up in infra
activities should improve non-agri income for farmers. Thus FY17 will be a year
of consolidation and pickup in rural economy if any could be seen only in FY18.
Long term structural drivers intact for rural economy: Given weak sentiment
in farming and lower income levels, consumption demand in the near term looks
subdued. However, we believe long term structural trends for rural India remain
firm - (a) increasing profitability through cash crops and allied activities, (b)
increase diversification through non-farming income, (c) targeted direct benefit
transfer, and (d) usage of higher mechanization and awareness of technical
advancements.
Estimates remain conservative; expect some pickup in AUM growth only in
FY18: We expect FY17 to be a year of consolidation and our estimates remain
conservative. For eg. In case of Mahindra Finance (MMFS) we are factoring 11%
growth in AUM for FY17E. However in FY18E we are factoring pick up in AUM
growth at 16%. For NBFCs under coverage we expect 16-29% growth in AUM in
FY18E as shown below.
Exhibit 76. AUM Growth trends in NBFCs under coverage
Source: JM Financial
Prefer SHTF, CIFC and MMFS as top picks amongst CV financing and rural
NBFC
We expect CV financiers to be key beneficiaries of improvement in economic
activity and prefer Shriram Transport as top pick in CV financing space. We
believe MMFS is well placed to benefit from rural recovery assuming normal
monsoon and pick up in government spending and prefer Mahindra Finance as
top pick in rural space.
Exhibit 77. Peer Valuations
ROA (%) ROE (%) P/B P/E
FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E
SHTF 2.3% 2.2% 2.2% 2.3% 14.1% 14.3% 15.1% 16.8% 2.4 2.1 1.9 1.6 17.7 15.6 13.1 10.4
MMFS 2.5% 1.8% 2.0% 2.4% 15.5% 11.5% 13.4% 16.1% 3.0 2.8 2.5 2.3 20.4 25.2 19.9 14.9
SCUF 3.2% 3.4% 3.4% 3.5% 16.0% 15.2% 16.0% 17.0% 2.7 2.4 2.1 1.8 19.6 16.5 13.8 11.4
BAF 3.1% 3.3% 3.2% 3.1% 20.4% 21.0% 20.2% 21.2% 7.3 4.9 4.1 3.4 38.8 28.7 21.9 17.4
CIFC 1.9% 2.1% 2.3% 2.4% 17.5% 17.1% 16.8% 18.1% 4.3 3.4 3.0 2.5 26.3 23.0 18.9 15.1
Source: Company, JM Financial, Valuations as on 28th
April 2016
-20%
0%
20%
40%
60%
80%
100%
FY11
FY12
FY13
FY14
FY15
FY16
E*
FY17
E
FY18
E
BAF CIFC MMFS SCUF SHTF
FY17 is expected to be year of consolidation and
AUM growth is factored from FY18 onwards
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 54
Box 13: Punjab MMFS branch visit summary (Amritsar and Ferozpur)
Rabi crop has been better this year in most parts of Punjab and there is very
limited impact of unseasonal rainfall this year. MMFS has witnessed
improvement in collection efficiencies and asset quality has improved
signficantly as some critical NPLs have closed down in Q4. There is some
improvement in MMFS customer cash flow due to pre-election spending and
slight improvement in crop yield YoY.
Crop outlook:
1. Most of the area under agriculture is irrigated (canals and tube wells) and
there is very little dependence on monsoons. Unseasonal rainfall during mid-
march has had very little impact on the Rabi wheat crop production.
2. Many farmers have taken up cultivation of vegetables (mainly potato) to
supplement regular farm income. Vegetables are a short duration crop and
hence farmers can rotate multiple crops. Further the profit margin on
vegetables is much higher (>50%). But the realization is subject to market
forces and hence volatile.
3. Wheat (Rabi), Rice (mostly Kharif) and Potato are 3 major crops. Govt has
announced MSP for wheat at Rs 1525/qtl (+5%YoY). Basmati Rice prices
declined from Rs3000 per qtl to Rs1500-1600/qtl during the last Kharif on
bumper harvest and Iran’s ban on rice import from India. Now the Basmati
rice prices have picked up.
4. Contract farming is also on the rise as farmers get assured return on the
crop. Such practices are mainly done for crops like Peas, Capsicum and
Chicory
MMFS customer cash flow: MMFS customer’s cash flow has witnessed some
improvement in last 6 months due to:
a) Govt. spending has improved due to elections next year. Metro, Bridge
construction and Bus corridor work has started in Amritsar,
b) Payments to CV/CE brokers have been released,
c) Basmati Rice and potato wholesale price (crop sold to grain merchants) has
improved YoY while sugarcane mills are getting timely payment from Govt.
now and
d) Partial lifting of sand mining ban – Govt of Punjab had banned sand mining
3 years back due to which farmer side income from sand mining (who use
to mine sand from their farms) was impacted. Govt. has now partially
allowed sand mining positively impacting customer’s cash flow
Asset Quality: Collection efficiency has improved to 98% compared to 94%
YoY (Amritsar Branch) while it has improved to 107% vs 98% YoY in Ferozpur
branch. Most importantly, some critical NPL have closed down this year.
Muted growth trends: Growth continues to be a challenge as Tractor demand
is sluggish and is unlikely to improve for next 2 crop seasons.
Cash flow has improved in Punjab driven by pre-
election spending and partial lifting of sand
mining ban. Tractor sales however, are not
expected to improve at least for next 2 crop
cycles
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 55
Exhibit 78. Visit to MMFS customers in Amritsar and Ferozpur
Punjab agri economy is dependent on canals and tube wells
for farming, also electricity is free for farmers
Outlook on Rabi Crop output in Punjab is favourable this year
Source: Rural Safari
Exhibit 79. Visit to MMFS customers in Amritsar and Ferozpur
Vegetable production has been encouraging…. Reliance on non-farm income has picked up in last 2-3 years
Source: Rural Safari
Exhibit 80. Visit to MMFS customers in Amritsar and Ferozpur
Increase in MSP prices for wheat crop this year has positively
impacted customers cash flow
… along with pick up in construction activities as pre-election
expenditure has picked up
Source: Rural Safari
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 56
Box 14: Pickup in construction activities is positive. However, cash flow
recovery is atleast 2 crop cycles away - Mahindra Finance’s
Hanamakonda (Warangal) and (Mandya) Karnataka branch visit
Karnataka
Farmers switching to lower yielding alternate crops as reservoir level
dips due to poor monsoons - The main crops in the area are cotton,
sugarcane, paddy, tobacco, ginger and turmeric. Poor monsoons and lower
reservoir levels in Karnataka have made the irrigation unfit for crops like
cotton and sugarcane forcing the farmers to grow lower yielding crops like
pulses and coarse cereals.
Poor rainfall has badly affected customer’s cash flow: Three consecutive
poor rainfalls have badly affected farmers’ cash flow and recovery has been a
challenge in these areas. Cash flows have also been under pressure due to
closing down of sugar factories especially in Mandya region. As per MMFS
personnel, it could take at least 2 good crop cycles for the situation to
improve.
Telangana
Tractor growth picking up driven by increase in irrigation projects: While
Govt. spending in Karnataka is muted (barring few lake projects); Telangana is
witnessing increased activities in irrigation projects. This has led to increase
in employment in these areas and increase in tractor usage - MMFS Warangal
branch has witnessed 50% YoY growth in tractors aided by rise in construction
activities.
Telangana has seen increased activities
in irrigation projects driving upwards
tractor usage
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 57
Cement – Monsoons to trigger pent-up demand
Rural housing is a significant driver of cement demand contributing to c.40%
of the total demand. Given significant housing short-fall, still below par
penetration of “pucca” houses in rural India and structural uptick in rural
wage levels, we believe in the medium to long term rural sector will remain
the key driver of cement demand and could outpace urban demand. In the
last two years though, with the rural economy slowing down considerably
and with decline in rural income levels, cement demand was particularly
negatively impacted as rural housing spend were cut considerably. We
expect a potential revival in the upcoming year driven by potentially good
monsoon, uptick in government spending and pent-up demand kicking-in.
Last two years have seen significant slowdown in rural cement demand: Our
discussions with various players in the cement value chain suggest that in the
last two years, demand from the rural housing side for cement consumption
slowed considerably impacted by several factors. With the slowdown in economy,
rural income has been particularly impacted (declining in the last two years).
Poor monsoons have compounded the matter further. Housing sector spending
being large ticket and discretionary in nature bore the brunt of slowdown.
Several factors points towards potential revival: We expect a revival in the
cement demand in the rural sector going forward on back of:
Normal monsoon forecast: After two successive years of poor monsoon,
India Meteorological Department (IMD) has forecasted a slightly higher than
expected monsoon in the upcoming season. This should bring in the much
needed relief and boost the rural income and stimulate demand for housing.
Uptick in Government spending: The impact of increased government
spending has already started to show-up in increased demand from
infrastructure sector for the cement players. With government’s focus on
rural irrigation and housing schemes, these segments are also expected to
start contributing to demand in the near term
Multiplier effect of infrastructure spending: The sharp uptick in
infrastructure related spending is likely to have a strong multiplier effect as
it will help boost earnings of labor force.
Pent-up demand: Demand in the cement sector tends to be cyclical to a
certain extent. Having suffered a significant slowdown in last two years and
grown lower than GDP, pent-up demand is likely to kick-in sooner or later.
Interest rate reduction: Reducing interest rate scenario should also help
even though housing finance penetration in rural market remains low
Structural drivers’ remains intact: Rural housing is a significant driver of
cement demand contributing to c.40% of the total demand. We believe rural
economy will continue to be a significant driver of cement demand over the
medium to long term given: (1) rural housing shortfall continues to be high at
c.43.7mn units (as per census data); (2) a vast majority of rural houses (over
50%) are still non-concrete or Katcha - increasingly there has been a shift towards
pucca houses; (3) the disparity on physical infrastructure in rural areas vs urban
is stark in India - various government schemes are targeted towards bridging the
gap to certain extent; (4) Rural wages have continued to rise sharply in the last
decade (barring last few years), which help boost demand for discretionary spend
like housing.
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 58
Exhibit 81. Cement demand – Rural demand is an important demand driver
Rural housing contributes c.40% to the cement demand; rural infrastructure is an additional driver
Rural housing continues to form a c.40% of the demand Rural wage rate continues to increase
Lowering of interest rate to stimulate housing demand Eyes on rainfall, would add fuel to rural demand
Source: CRISIL, JM Financial.
Exhibit 82. India – Pucca houses
Growth in pucca houses is higher than the growth in total number of houses
2001 Census 2011 Census
Total Rural Urban Total Rural Urban
Total number of census houses (mn) 249 178 72 305 207 98
Pucca roof houses (%) 48 37 75 62 52 83
Pucca wall houses (%) 59 49 84 67 58 88
Pucca floor houses (%) 44 29 83 54 37 88
Growth (%)
Total number of census houses
2.0 1.5 3.2
Pucca roof houses
4.7 5.1 4.2
Pucca wall houses
3.4 3.2 3.8
Pucca floor houses
4.0 4.2 3.9
Source: Census, JM Financial.
Commerical & Industrial
Construction, 21.0%
Infrastructure, 20.0%
Rural Housing, 40.00%
Urban Housing,
19.0%
0.6%
5.7% 5.6%
8.2%
11.8%
16.2%
19.2% 18.9%17.9%
27.9%
10.9%
0%
5%
10%
15%
20%
25%
30%
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Wage grwoth rate (%)
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
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-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
FY
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FY
91
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92
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94
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96
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P
FY
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E
Rainfal - (in % Depature) Cement demand growth (%)
JM Financial Institutional Securities Limited
Govt. spending and normal monsoon could lead to
strong recovery
MMFS asset quality has been adversely impacted in last 2 years due to 2
consecutive poor monsoons, decline in Infra spending and slowdown in rural
economy. However company has shown strong resilience and strong
recoveries in Q4 have resulted in significant improvement in its asset quality
with GNPL ratio improving to 7.9% (vs. 9.9% in 3Q16) and coverage ratio
remaining high at 62% despite migrating to 120DPD. Subsidiary performance
have been healthy with housing subsidiary witnessing 56% CAGR growth in
last 3 years and management expects similar growth trends to continue as it
expects c.25% of business to come from semi-urban market. We believe
MMFS is well placed to benefit from rural recovery assuming normal
monsoon and pick up in government spending. Maintain BUY with revised TP
of Rs345. Key Risk – Poor monsoon
Budget proposals encouraging, execution of these measures and
monsoon holds the key: Measures announced by Government in the budget
include a) increase in budget outlay for NREGA schemes, rural development
and agriculture & allied services, b) targeting to double farmers’ earnings in 5
years via a series of measures such as transparent procurement system,
increase area under irrigation, etc. MMFS will be a significant beneficiary of
rural recovery from FY17 onwards. While near term outlook remains weak, we
expect recovery from FY17 driven by govt capex. Management continues to
invest in distribution which bodes well for growth and recovery from a
medium term perspective. Longer term, growth would be driven by car, CV
and SME segment. We expect 14% CAGR in NII over FY16–18E with slight
improvement in margins.
Provision coverage remain healthy at 62% despite migration to 120DPD:
Company’s focus on recoveries resulted in significant improvement in its
asset quality as GNPL ratio on AUM basis improved to 7.9% in 4Q16 (vs. 9.9%
in 3Q15) despite migrating to 120DPD. Coverage ratio remained high at 62%.
In the long run we expect remain asset quality to remain stable due to a)
Rural economy no longer depends only on the agri output but has diversified
cash flows driven by government spending b) Change in customer profile
from farmers to non--farmers such as contractors, construction developers
etc. c) Change in MMFS's collection and sourcing policy with separate teams
for sourcing and collection d) Earlier tractor was purely used for farming
purpose while now c.50% of tractor usage is non–farm purpose which is less
cyclical in nature. However in short term we expect asset quality pressure to
continue. We have factored credit costs of 240bps/195bps in FY17/18E.
Despite slowdown, investment in distribution network continues: MMFS
has added 510 branches in last 2 years (which is 44% of its existing branch
network). Despite slowdown in the business, continuous investment in
distribution network augurs well for the company. Investment in distribution
network should continue, aiding collection initially and supporting growth
later. We believe that MMFS is building a long term strategy to improve its
franchise which will benefit the company by 1) improving collection efficiency
initially by getting closer to the customers 2) later these branches will be used
for sourcing loans once the cycle picks up 3) deeper penetration would give
MMFS first mover advantage.
Subsidiaries to add significant value: a) Housing Finance - portfolio has
grown at 56% CAGR in last 3 years and its AUM proportion to the
consolidated AUM has increased to 7.4% (vs. 4% in FY14). Company has now
also started focusing on higher ticket size loans and management believes
growth momentum will continue and expects 50% growth over the next 2
years. b) AMC Business - will focus on rural and semi-urban markets with
Karan Singh, CFA, FRM
Tel: (91 22) 66303082
Nikhil Walecha
Tel: (91 22) 66303027
Ruchika Birla
Tel: (91 22) 6630 3263
Puneet Gulati
Tel: (91 22) 66303072
Jayant Kharote
Tel: (91 22) 6630 3099
Key Data
Market cap (bn) ` 156.8 / US$ 2.4
Shares in issue (mn) 563.5
Diluted share (mn) 563.5
3- mon avg daily val (mn) ` 338.4/US$ 5.1
52- week range ` 294.3/173.1
Sensex/Nifty 25,838/7,899
`/US$ 66.5
Daily Performance
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40%
0
50
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150
200
250
300
350
400
Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16
M&M Financial
M&M Financia l Relati ve to Sensex (R HS)
% 1M 3M 12MAbsolute 14.6 38.1 -0.5
Relative 12.6 32.4 6.9
* To the BSE Sensex
Shareholding Pattern (%)
D ec-15 D ec-14
Promoters 52.0 52.0
FII 34.0 41.6
DII 9.4 1.4
Public / Others 4.6 4.9
M&M Financial | MMFS IN
4 May 2016
India | NBFC
Price: Rs276
BUY
12M Target: Rs345
JM Financial Research is also available
on: Bloomberg - JMFR <GO>,
Thomson Publisher & Reuters,
S&P Capital IQ and FactSet
Please see Appendix I at the end of this
report for Important Disclosures and
Disclaimers and Research Analyst
Certification.
M&M Financial 4 May 2016
JM Financial Institutional Securities Limited Page 60
capital protection products and group employees leveraging further on
parent M&M‘s relationship to sell these products.
Significant improvement in financial performance for MMFS will be
visible in FY18 if rural economy recovers; Maintain BUY with TP of Rs345:
We expect earnings CAGR of c.30% over FY16–18E and return ratios with ROA
of 2.4% and ROE of 16% by FY18E. We value MMFS standalone at 2.4x Mar’18
BV implying value of Rs316. We value MRHF at Rs15 per share while MIBL at
Rs14 per share, implying TP of Rs345.
E 1.Vicky
M&M Financial 4 May 2016
JM Financial Institutional Securities Limited Page 61
Financial Tables (Standalone)
Profit & Loss (` Mn) FY14 FY15 FY16 FY17E FY18E
Net Interest Income (NII) 27,382 30,477 32,289 36,434 41,882
Non-Interest Income 268 403 369 407 460
Total Income 27,650 30,880 32,658 36,841 42,343
Operating Expenses 9,134 10,068 11,781 13,561 15,533
Pre-provisioning Profits 18,516 20,811 20,877 23,280 26,809
Loan Loss Provisions 4,847 8,169 10,297 10,193 9,339
Other Provisions 211 106 198 158 268
Total Provisions 5,058 8,275 10,495 10,351 9,607
PBT 13,458 12,536 10,382 12,929 17,203
Tax 4,585 4,219 3,656 4,396 5,849
PAT (Pre-Extra ordinaries) 8,873 8,318 6,726 8,533 11,354
Extra ordinaries (Net of Tax) 0 0 0 0 0
Reported Profits 8,873 8,318 6,726 8,533 11,354
Dividend 2,515 2,717 2,713 2,731 3,633
Retained Profits 6,358 5,601 4,013 5,802 7,721
Source: Company, JM Financial
Balance Sheet (` Mn) FY14 FY15 FY16 FY17E FY18E
Equity Capital 1,127 1,128 1,129 1,129 1,129
Reserves & Surplus 49,728 55,402 59,588 65,390 73,111
Stock Option Outstanding 87 164 164 172 181
Shareholders' Equity 50,942 56,694 60,881 66,692 74,421
Preference Share Capital 0 0 0 0 0
Borrowed Funds 239,306 262,633 294,400 327,373 383,517
Deferred tax liabilities 0 0 0 0 0
Current Liabilities 26,409 31,414 40,514 44,937 52,220
Total Liabilit ies 316,657 350,741 395,795 439,001 510,158
Loans & Advances 296,170 329,298 366,578 406,119 473,041
Investments 8,692 8,537 14,833 16,651 18,922
Intangible Assets 0 0 0 0 0
Cash & Bank Balances 6,892 7,038 5,890 6,904 7,805
Other Current Assets - CA 558 616 1,506 1,577 1,639
Fixed Assets 1,195 1,101 1,135 1,259 1,463
Miscellaneous expenditure 0 0 0 0 0
Deferred Tax Asset 3,151 4,153 5,853 6,492 7,289
Total Assets 316,657 350,741 395,795 439,001 510,158
Source: Company, JM Financial
Key Rat ios (%) FY14 FY15 FY16 FY17E FY18E
Growth (YoY) (%)
Borrowed Funds 26.8% 9.7% 12.1% 11.2% 17.2%
Advances 23.2% 11.2% 11.3% 10.8% 16.5%
Total Assets 24.2% 10.8% 12.8% 10.9% 16.2%
NII 21.4% 11.3% 5.9% 12.8% 15.0%
Non-Interest Income 25.7% 50.2% -8.2% 10.1% 13.2%
Operating Expenses 23.1% 10.2% 17.0% 15.1% 14.5%
Operating Profits 20.7% 12.4% 0.3% 11.5% 15.2%
Core Operating Profits 20.9% 12.1% 0.3% 11.5% 15.2%
Provisions 78.5% 63.6% 26.8% -1.4% -7.2%
Reported PAT 0.5% -6.3% -19.1% 26.9% 33.1%
Yields / Margins (%)
Interest Spread (%) 7.28% 6.94% 6.55% 6.70% 6.87%
NIM (Inc l. securitization) (%) 9.73% 9.28% 8.82% 8.92% 9.01%
Profitability (%)
ROA (%) 3.10% 2.49% 1.80% 2.04% 2.39%
ROE (%) 18.6% 15.5% 11.5% 13.4% 16.1%
Cost to Income (%) 33.0% 32.6% 36.1% 36.8% 36.7%
Assets Quality (%)
Gross NPAs (%) 4.62% 6.14% 8.34% 10.00% 9.71%
LLP (%) 2.19% 3.02% 3.56% 2.68% 2.19%
Capital Adequacy (%)
Tier I (%) 16.29% 15.50% 14.61% 14.69% 14.15%
CAR (%) 18.63% 18.30% 17.31% 17.52% 16.96% Source: Company, JM Financial
Du-pont Analysis (%) FY14 FY15 FY16 FY17E FY18E
NII / Assets (%) 9.58% 9.13% 8.65% 8.73% 8.83%
Other income / Assets (%) 0.09% 0.12% 0.10% 0.10% 0.10%
Total Income / Assets (%) 9.68% 9.25% 8.75% 8.83% 8.92%
Cost to Assets (%) 3.20% 3.02% 3.16% 3.25% 3.27%
PPP / Assets (%) 6.48% 6.24% 5.59% 5.58% 5.65%
Provisions / Assets (%) 1.77% 2.48% 2.81% 2.48% 2.02%
PBT / Assets (%) 4.71% 3.76% 2.78% 3.10% 3.62%
Tax Rate (%) 34.07% 33.65% 35.21% 34.00% 34.00%
ROA (%) 3.10% 2.49% 1.80% 2.04% 2.39%
Leverage (%) 6.0 6.2 6.4 6.6 6.7
ROE (%) 18.62% 15.49% 11.47% 13.41% 16.13%
Source: Company, JM Financial
Valuat ions FY14 FY15 FY16 FY17E FY18E
Shares in issue (mn) 563.5 564.1 564.5 564.5 564.5
EPS (Rs.) 15.7 14.7 11.9 15.1 20.1
EPS (YoY) (%) 0.4% -6.4% -19.2% 26.9% 33.1%
PE (x) 17.5 18.7 23.1 18.2 13.7
BV (Rs.) 90 100 108 118 132
BV (YoY) (%) 14% 11% 7% 10% 12%
P/BV (x) 3.05 2.74 2.56 2.33 2.09
DPS (Rs.) 4.5 4.8 4.8 4.8 6.4
Div. y ield (%) 1.6% 1.8% 1.7% 1.8% 2.3% Source: Company, JM Financial
JM Financial Institutional Securities Limited
Attractive play on rural recovery
Over the last two years, while domestic 2 wheeler industry witnessed sub-par
growth, Hero Motocorp (HMCL) commendably held on to its market share (at
c.40%) despite extremely fierce competition. While the competitive landscape
may not change significantly, we believe HMCL has weathered two most
serious threats (weak rural demand + aggressive launches from peers) better
than expectations. We expect HMCL to deliver healthy 13.5% earnings CAGR
during FY16-18E driven by a) robust growth in scooters (22% CAGR), b) rural
demand recovery on better monsoon, c) benefits of deep network penetration,
and d) improving profit margins. We believe HMCL is at the cusp of an up-cycle
led by rural recovery and we rate the stock as BUY.
HMCL enjoying commendable market share strength, led by scooters:
Although domestic motorcycle demand has been weak, HMCL has
commendably held on to its market share at c.53%, despite weak rural
economy. The same remains enviably strong at c.40% in the total 2- wheeler
segment as well. In scooters, HMCL has grown its market share to c.20%
currently from c.15% at the beginning of FY16. It dominates the domestic
executive motorcycle space, which constitutes c.65% of the domestic
motorcycle market and should aid growth as rural demand recovers.
Multiple levers for growth: In our view, HMCL’s volume growth would be
driven by - a) improvement in rural economy on better monsoons post two
years of agrarian crisis and govt. led initiatives to protect farmer’s income (pent
up demand), b) strong comeback in fastest growing scooters category, c) Slew
of launches/refreshes supported by renewed thrust on in- house R&D, and d)
deep network penetration, way ahead of its peers.
Profitability improvement ahead of competition: HMCL's EBITDA margin over
the last 4 quarters has improved to 15.6%, an expansion of 360bps ahead of
BJAUT (-60bps) and TVSL (+110bps). The LEAP program has contributed 80bps
improvement to margin in 9MFY16. We believe benign input costs and cost
control measures should help maintain margin at c.15% levels. With bulk of the
initial R&D capex behind us, we expect R&D spend to normalize ensuring
healthy cash flows with stable ROE at a strong c.40%.
Risk-reward in favor: HMCL is currently trading at 14.4x FY18E PER, a c.15%
discount to its 5-yr avg. With multiple growth triggers led by a highly probable
upswing in rural economy, we estimate earnings to grow at 13.5%CAGR FY16-
18E driven by 9.5%CAGR volume growth. 1.
Hero Motocorp | HMCL IN
4 May 2016
India | Auto
Exhibit 1: Financial Summary (Rs mn)
Y/E March FY14A FY15A FY16E FY17E FY18E
Net sales 251,249 273,506 283,158 318,594 359,939
Sales growth (%) 6.5 8.9 3.5 12.5 13.0
EBITDA 33,895 33,075 43,077 46,933 54,948
EBITDA (%) 13.5 12.1 15.2 14.7 15.3
Adjusted net profit 21,091 25,407 31,306 34,124 40,261
EPS (Rs) 105.6 127.2 156.8 170.9 201.6
EPS growth (%) -0.4 20.5 23.2 9.0 18.0
ROCE (%) 39.1 42.2 46.1 45.6 49.4
ROE (%) 39.8 41.9 43.3 39.8 40.0
PE (x) 27.4 22.8 18.5 17.0 14.4
Price/Book value (x) 10.3 8.8 7.3 6.3 5.3
EV/EBITDA (x) 15.8 16.5 12.4 11.2 9.2
Source: Company data, JM Financial. Note: Valuations as of 02/05/2016
Ambrish Mishra
Tel: (91 22) 66303019
Shyam Sundar Sriram
Tel: (91 22) 66303077
Key Data
Market cap (bn) Rs 578.6 / US$ 8.7
Shares in issue (mn) 199.7
Diluted share (mn) 199.7
3-mon avg daily val (mn) Rs 1333.6/US$ 20.1
52-week range Rs 3172.0/2251.3
Sensex/Nifty 25,607/7,850
Rs/US$ 66.3
Daily Performance
-10%
0%
10%
20%
30%
40%
50%
60%
0
500
1000
1500
2000
2500
3000
3500
Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16
Hero MotoCorp
Hero MotoCorp Relative to Sensex (RHS)
% 1M 3M 12M
Absolute 1.4 12.9 22.1
Relative* -1.4 10.0 28.1
* To the BSE Sensex
Shareholding Pattern (%)
Dec-15 Dec-14
Promoters 34.6 39.9
FII 41.9 39.3
DII 14.6 7.4
Public / others 8.9 13.3
Source: BSE
Price: Rs2,897
BUY
12M Target: Rs3,470
JM Financial Research is also available
on: Bloomberg - JMFR <GO>,
Thomson Publisher & Reuters,
S&P Capital IQ and FactSet
Please see Appendix I at the end of this
report for Important Disclosures and
Disclaimers and Research Analyst
Certification.
Hero Motocorp 4 May 2016
JM Financial Institutional Securities Limited Page 63
SWOT Analysis
Exhibit 2. SWOT
Strengths Weaknesses
Market leader in 2 wheelers with steady c.40% market share. Dominance in
the executive segment which constitutes c.65% of the motorcycle segment.
Increasing market share (c.20% now) in fastest growing scooters segment.
Deep Network penetration that provides a distinctive competitive advantage.
Growing profitability in terms of margin expansion (360bps over 4qtrs)
Weak product portfolio in premium motorcycles.
Yet to establish strengths in R&D.
Opportunities Threats
Scooter growth outpacing 2 wheeler growth and increasing penetration.
Increasing premiumisation of motorcycles, even within 100/110 cc models.
Expansion into new global markets.
High competitive intensity.
Significant capacity addition in 2-wheeler segment may put
pressure on pricing.
Weakness in rural economy.
Source: JM Financial
Focus Charts
Exhibit 3. Focus Charts
Defending market share in domestic motorcycles Strong traction in scooters
40
44
48
52
56
60
0
100
200
300
400
500
600
Apr
-14
May
-14
Jun-
14
Jul-1
4
Aug
-14
Sep
-14
Oct
-14
Nov
-14
Dec
-14
Jan-
15
Feb
-15
Mar
-15
Apr
-15
May
-15
Jun-
15
Jul-1
5
Aug
-15
Sep
-15
Oct
-15
Nov
-15
Dec
-15
Jan-
16
Feb
-16
Mar
-16
Uni
ts in
'000
HMCL Dom. Motorcycle Volume HMCL Motorcycle Market Share (RHS, %)
10
15
20
25
0
20
40
60
80
100
120
Apr
-14
May
-14
Jun-
14
Jul-1
4
Aug
-14
Sep
-14
Oct
-14
Nov
-14
Dec
-14
Jan-
15
Feb
-15
Mar
-15
Apr
-15
May
-15
Jun-
15
Jul-1
5
Aug
-15
Sep
-15
Oct
-15
Nov
-15
Dec
-15
Jan-
16
Feb
-16
Mar
-16
Uni
ts in
'000
HMCL Dom. Scooters volume HMCL Scooters Market Share (RHS, %)
Monsoons unlikely to play truant post 2 deficit years Deep network penetration ahead of peers
Healthy expansion in EBITDA margin Stable ROE with improving free cash flow
-60 bps
110 bps
360 bps
500 bps
-5%
0%
5%
10%
15%
20%
25%
30%
35%
Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16
HMCL BJAUT TVSL EIM - SA
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
0
5
10
15
20
25
30
35
40
45
FY14A FY15A FY16E FY17E FY18E
Free cash flow (Rs bn) ROE (%, RHS)
Source: Company, JM Financial
Hero Motocorp 4 May 2016
JM Financial Institutional Securities Limited Page 64
Financial Tables
Profit & Loss (Rs mn)
Y/E March FY14A FY15A FY16E FY17E FY18E
Net sales (Net of excise) 251,249 273,506 283,158 318,594 359,939
Growth (%) 6.5 8.9 3.5 12.5 13.0
Other operational income 0 0 0 0 0
Raw material (or COGS) 182,299 197,539 193,256 219,033 248,358
Personnel cost 9,300 11,729 13,082 14,257 16,017
Other expenses (or SG&A) 25,755 31,163 33,744 38,370 40,616
EBITDA 33,895 33,075 43,077 46,933 54,948
EBITDA (%) 13.5 12.1 15.2 14.7 15.3
Growth (%) 9.4 -2.4 30.2 9.0 17.1
Other non-op. income 5,474 6,784 4,749 5,223 6,007
Depreciation 11,074 5,400 4,465 5,375 6,137
EBIT 28,296 34,459 43,360 46,781 54,818
Add: Net interest income 377 380 242 286 334
Pre tax profit 28,672 34,838 43,602 47,067 55,152
Taxes 7,582 9,432 12,296 12,943 14,891
Add: Extraordinary items 0 -1,550 0 0 0
Less: Minority interest 0 0 0 0 0
Reported net profit 21,091 23,856 31,306 34,124 40,261
Adjusted net profit 21,091 25,407 31,306 34,124 40,261
Margin (%) 8.4 9.3 11.1 10.7 11.2
Diluted share cap. (mn) 200 200 200 200 200
Diluted EPS (Rs.) 105.6 127.2 156.8 170.9 201.6
Growth (%) -0.4 20.5 23.2 9.0 18.0
Total Dividend + Tax 15,199 14,019 17,524 21,028 23,365
Source: Company, JM Financial
Balance Sheet (Rs mn)
Y/E March FY14A FY15A FY16E FY17E FY18E
Share capital 399 399 399 399 399
Other capital 0 0 0 0 0
Reserves and surplus 55,599 65,014 78,797 91,892 108,788
Networth 55,999 65,414 79,196 92,291 109,187
Total loans 245 313 313 313 313
Minority interest 0 0 0 0 0
Sources of funds 56,243 65,727 79,510 92,605 109,501
Intangible assets 0 0 0 0 0
Fixed assets 69,089 84,104 94,809 110,893 117,220
Less: Depn. and amort. 46,657 52,057 56,521 61,897 68,034
Net block 22,433 32,047 38,287 48,997 49,186
Capital WIP 8,541 4,205 7,585 3,327 3,517
Investments 40,888 31,541 36,041 40,541 47,541
Def tax assets/- liability 1,060 735 -224 -930 -1,757
Current assets 28,052 36,689 45,487 55,545 71,878
Inventories 6,696 8,155 8,534 9,601 10,847
Sundry debtors 9,206 13,896 12,800 13,966 15,778
Cash & bank balances 1,175 1,594 8,675 14,596 25,658
Other current assets 699 1,200 1,320 1,452 1,597
Loans & advances 10,277 11,845 14,158 15,930 17,997
Current liabilities & prov. 44,730 39,490 47,666 54,874 60,863
Current liabilities 28,787 31,494 29,385 32,846 36,499
Provisions and others 15,943 7,997 18,281 22,028 24,365
Net current assets -16,678 -2,801 -2,179 670 11,015
Others (net) 0 0 0 0 0
Application of funds 56,243 65,727 79,510 92,605 109,501
Source: Company, JM Financial
Cash flow statement (Rs mn)
Y/E March FY14A FY15A FY16E FY17E FY18E
Reported net profit 21,091 23,856 31,306 34,124 40,261
Depreciation and amort. 10,516 5,400 4,465 5,375 6,137
-Inc/dec in working cap. 1,289 -637 -1,391 1,227 594
Others 0 0 0 0 0
Cash from operations (a) 32,896 28,619 34,380 40,726 46,993
-Inc/dec in investments -4,649 9,347 -4,500 -4,500 -7,000
Capex -10,159 -10,678 -14,085 -11,827 -6,517
Others 1,593 -12,821 7,851 1,843 124
Cash flow from inv. (b) -13,216 -14,153 -10,733 -14,483 -13,393
Inc/-dec in capital 45 -422 0 0 0
Dividend+Tax thereon -15,199 -14,019 -17,524 -21,028 -23,365
Inc/-dec in loans -2,777 69 0 0 0
Others -2,384 324 959 706 827
Financial cash flow ( c ) -20,315 -14,048 -16,564 -20,322 -22,538
Inc/-dec in cash (a+b+c) -635 418 7,082 5,921 11,062
Opening cash balance 1,810 1,175 1,594 8,675 14,596
Closing cash balance 1,175 1,593 8,675 14,596 25,658
Source: Company, JM Financial
Key Ratios
Y/E March FY14A FY15A FY16E FY17E FY18E
BV/Share (Rs) 280.4 327.6 396.6 462.2 546.8
ROIC (%) 39.1 42.2 46.1 45.6 49.4
ROE (%) 39.8 41.9 43.3 39.8 40.0
Net Debt/equity ratio (x) -0.7 -0.5 -0.6 -0.6 -0.7
Valuation ratios (x)
PER 27.4 22.8 18.5 17.0 14.4
PBV 10.3 8.8 7.3 6.3 5.3
EV/EBITDA 15.8 16.5 12.4 11.2 9.2
EV/Sales 2.1 2.0 1.9 1.6 1.4
Turnover ratios (no.)
Debtor days 13 19 17 16 16
Inventory days 10 11 11 11 11
Creditor days 46 53 50 50 49
Source: Company, JM Financial
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 65
Appendix 1: Crop Economics
Exhibit 83. Per acre farm economics for Rice – Realization/Cost expected to improve in 2017
2011 2012 2013 2014 2015 2016 2017
Yield Quintal/Acre 13.5 14.5 14.9 14.6 14.1 13.8 14.2
Realization/Quintal 1,030 1,110 1,280 1,345 1,400 1,450 1,523
By-product 1,231 1,463 1,610 1,706 1,740 1,696 1,706
Total Realization 15,162 17,508 20,639 21,336 21,478 21,730 23,372
% YoY 5.6 15.5 17.9 3.4 0.7 1.2 7.6
Human Labour 3,081 3,296 3,629 4,190 4,641 5,116 5,373
Machine Labour 1,256 1,364 1,509 1,779 2,000 2,000 2,100
Animal Labour 649 840 833 896 943 991 1,040
Seeds 649 697 744 788 804 783 817
Fertilizers & manure 1,112 1,419 1,757 1,796 1,827 1,864 1,899
Pesticides & Insecticides 246 296 324 337 363 368 493
Water & Electricity 397 480 567 702 589 614 627
Working Capital 231 262 293 310 317 308 322
Miscellaneous 7 6 5 6 6 6 6
Total Cost 7,629 8,660 9,661 10,804 11,490 12,051 12,676
% YoY 11.0 13.5 11.6 11.8 6.3 4.9 5.2
Total Profit 7,533 8,848 10,978 10,532 9,989 9,679 10,696
Realization/Cost 1.99 2.02 2.14 1.97 1.87 1.80 1.84
Source: CMIE, Cost of Cultivation study, JM Financial, Farmer Interactions, Yield adjusted for Paddy instead of Rice with ratio of Rice/Paddy at 0.67, Relevant WPI indices used
Exhibit 84. Per acre farm economics for Wheat – Realization/Cost expected to improve in 2017
2011 2012 2013 2014 2015 2016 2017
Yield Quintal/Acre 12.1 12.9 12.6 12.7 12.1 11.7 12.3
Realization/Quintal 1,120 1,285 1,350 1,400 1,450 1,525 1,601
By-product 2,958 3,341 3,683 3,902 3,982 3,343 3,400
Total Realization 16,504 19,863 20,709 21,723 21,516 21,231 23,122
% YoY 9.3 20.4 4.3 4.9 (1.0) (1.3) 8.9
Human Labour 986 1,155 1,242 1,413 1,548 1,689 1,773
Machine Labour 1,894 2,081 2,346 2,577 2,753 2,932 3,124
Animal Labour 234 167 195 178 168 158 149
Seeds 853 871 992 1,052 1,073 901 916
Fertilizers & manure 1,012 1,360 1,634 1,670 1,699 1,704 1,731
Pesticides & Insecticides 107 110 135 140 151 105 141
Water & Electricity 1,040 1,261 1,252 1,550 1,302 1,324 1,328
Working Capital 192 219 244 258 264 221 225
Miscellaneous 7 5 3 3 3 3 3
Total Cost 6,325 7,229 8,043 8,841 8,960 9,037 9,390
% YoY 7.8 14.3 11.3 9.9 1.3 0.9 3.9
Total Profit 10,178 12,634 12,666 12,882 12,556 12,194 13,732
Realization/Cost 2.61 2.75 2.57 2.46 2.40 2.35 2.46
Source: CMIE, Cost of Cultivation study, JM Financial, Relevant WPI indices used
Exhibit 85. Per acre farm economics for Onion – Profitable but volatile earnings
2011 2012 2013 2014 2015 2016 2017
Yield 57.5 65.2 64.7 65.2 65.3 65.3 65.3
Realization 1,623 1,068 1,314 2,727 1,914 2,561 2,561
By-product 447 490 470 480 467 467 467
Total Realization 93,804 70,096 85,511 178,391 125,391 167,619 167,619
% YoY 23.7 (25.3) 22.0 108.6 (29.7) 33.7 -
Human Labour 4,669 7,461 7,809 9,742 11,418 13,290 15,469
Machine Labour 1,177 1,721 1,496 2,073 2,628 3,298 4,139
Animal Labour 513 457 334 292 266 244 224
Seeds 5,365 3,530 2,554 2,707 2,762 2,692 2,806
Fertilizers & manure 2,601 2,698 3,390 3,465 3,524 3,597 3,664
Pesticides & Insecticides 362 618 641 666 717 727 973
Water & Electricity 1,301 1,323 1,325 1,640 1,377 1,436 1,465
Working Capital 500 557 550 582 594 579 604
Miscellaneous - 12 36 37 37 36 38
Total Cost 16,487 18,378 18,134 21,203 23,324 25,899 29,382
% YoY 49.2 11.5 (1.3) 16.9 10.0 11.0 13.4
Total Profit 77,317 51,718 67,378 157,189 102,067 141,719 138,237
Realization/Cost 5.69 3.81 4.72 8.41 5.38 6.47 5.70
Source: CMIE, Cost of Cultivation study, JM Financial, Relevant WPI indices used
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 66
Exhibit 86. Per acre farm economics for Potato – Profitable but volatile earnings
2011 2012 2013 2014 2015 2016 2017
Yield Quintal/Acre 91.9 88.0 92.1 85.2 93.6 93.6 93.6
Realization/Quintal 845 788 1,298 1,392 1,876 1,035 1,035
By-product - - - - - - -
Total Realization 77,697 69,360 119,572 118,658 175,583 96,831 96,831
% YoY (12.5) (10.7) 72.4 (0.8) 48.0 (44.9) -
Human Labour 3,306 3,240 3,709 3,997 4,213 4,430 4,658
Machine Labour 1,186 1,753 1,715 1,960 2,154 2,358 2,581
Animal Labour 403 418 470 462 456 450 445
Seeds 7,793 6,540 9,107 9,650 9,846 9,596 10,003
Fertilizers & manure 3,175 3,880 5,313 5,430 5,523 5,637 5,743
Pesticides & Insecticides 284 353 313 325 350 355 475
Water & Electricity 1,187 1,667 1,490 1,845 1,549 1,615 1,648
Working Capital 542 558 694 736 750 731 762
Miscellaneous 0 1 96 98 100 97 102
Total Cost 17,876 18,411 22,907 24,503 24,942 25,270 26,416
% YoY (15.8) 3.0 24.4 7.0 1.8 1.3 4.5
Total Profit 59,821 50,949 96,665 94,156 150,641 71,561 70,415
Realization/Cost 4.35 3.77 5.22 4.84 7.04 3.83 3.67
Source: CMIE, Cost of Cultivation study, JM Financial, Relevant WPI indices used
Exhibit 87. Per acre farm economics for Arhar (Kharif) – Government focus to increase pulse acreage through higher
MSP increases
2011 2012 2013 2014 2015 2016 2017
Yield Quintal/Acre 2.7 2.7 3.1 3.3 3.1 3.0 3.3
Realization/Quintal 3,000 3,200 3,850 4,300 4,350 4,625 5,088
By-product 624 922 937 993 1,013 987 1,029
Total Realization 8,579 9,499 13,035 15,138 14,607 14,718 17,644
% YoY 16.8 10.7 37.2 16.1 (3.5) 0.8 19.9
Human Labour 2,360 2,224 2,665 3,212 3,730 4,164 4,514
Machine Labour 832 881 1,212 1,586 1,904 2,172 2,493
Animal Labour 1,084 1,184 1,303 1,364 1,397 1,441 1,501
Seeds 427 422 494 524 534 521 543
Fertilizers & manure 871 688 1,131 1,156 1,175 1,200 1,222
Pesticides & Insecticides 549 563 810 841 906 919 1,230
Water & Electricity 75 130 134 166 139 145 148
Working Capital 194 191 242 257 262 255 266
Miscellaneous 3 7 5 4 4 4 4
Total Cost 6,394 6,290 7,996 9,110 10,052 10,820 11,920
% YoY 20.5 (1.6) 27.1 13.9 10.3 7.6 10.2
Total Profit 2,185 3,209 5,039 6,029 4,556 3,898 5,724
Realization/Cost 1.34 1.51 1.63 1.66 1.45 1.36 1.48
Source: CMIE, Cost of Cultivation study, JM Financial, Relevant WPI indices used
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 67
Appendix 2: 2nd advanced estimate for Rabi 2016
production
2nd
Estimate released by Government in Feb 2016 under threat of downward revision
due to unseasonal rains
It is to be noted that Government’s second estimate of production (released in
Feb 2016) has forecast 4% higher cereal production led by 8.4% increase in wheat
output, while Rice and Coarse cereals are expected to decline YoY. Among other
key crops, pulses are expected to be flat.
Exhibit 88. Government’s advanced estimates for Rabi 2016 point to higher cereals and stable pulse output
Cereals – Expected to be higher output due to healthy wheat
production
Pulses output to stabilize in 2016, post decline in 2015
Source: CMIE, 2nd advanced estimates released in Feb 2016
Exhibit 89. Coarse cereals – Output to decline sharply in 2016 on account of
lower Maize production
Source: CMIE, 2nd advanced estimates released in Feb 2016
-8.6%-9.7%
-7.0%
-1.4%
3.9%
8.4%
-7.6%
-15.2%
-20%
-15%
-10%
-5%
0%
5%
10%
Cereals Wheat Rice Coarse cereals - Total
2014-15 - YoY (%) 2015-16 Forecast - YoY (%)
-10.1%
-23.1%
23.7%
-1.3%
0.4%
10.4%
-5.9%-7.8%
-30%
-20%
-10%
0%
10%
20%
30%
Pulses Gram (Pulses) Black gram (urad)(Pulses)
Green gram (Moong)(Pulses)
2014-15 - YoY (%) 2015-16 Forecast - YoY (%)
-1.4%
0.0% 0.6%
-12.1%
-15.2%
-5.1%
-24.4%
6.2%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
Coarse cereals - Total Jowar Maize Barley
2014-15 - YoY (%) 2015-16 Forecast - YoY (%)
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 68
Appendix 3: Rural Consumption
Exhibit 90. Rural MPCE (Rs) per fractile class (2012)
Spend by category 0-5 5-10 10-20 20-30 30-40 40-50 50-60 60-70 70-80 80-90 90-95 95-100 Overall
Cereals and pulses 125 148 163 173 182 187 196 203 215 231 241 293 195
Oils and Spices 51 61 71 80 88 96 105 113 123 135 148 191 104
Sugar & Salt 12 15 17 20 21 24 26 28 31 36 40 52 26
Vegetables 52 64 71 79 83 88 93 100 109 119 132 162 95
Milk+ 18 32 49 58 75 91 103 124 148 192 239 332 115
Meat+ 14 22 30 42 49 55 68 74 84 102 123 201 68
Fruits 5 7 12 17 22 28 33 41 54 70 96 150 41
Beverages 40 52 60 68 79 90 97 112 129 156 197 388 113
Food (total) 316 401 472 535 599 659 722 795 891 1,040 1,217 1,770 756
Non-Food expenses
Fuel 65 76 83 92 97 104 111 120 130 148 169 203 114
Clothing & Footwear 44 55 62 70 78 87 97 105 117 138 167 233 100
Medical 16 25 31 43 47 56 68 78 106 144 221 494 95
Education 8 11 15 20 22 28 31 41 54 79 121 278 50
Household consumables+ 24 30 35 41 45 52 58 66 76 89 111 154 62
Consumer services+ 23 32 42 52 64 77 90 114 137 189 266 492 117
Rent & taxes 0 1 1 2 3 3 5 7 9 14 30 81 10
Entertainment 2 3 4 5 8 10 13 15 19 25 33 50 14
Tobacco+ 15 20 23 27 33 35 40 49 55 67 81 140 46
Consumer durables 9 13 14 17 22 25 31 37 51 75 140 586 65
Total non-food 206 265 311 369 419 477 544 632 754 968 1,340 2,711 673
Total spend 521 666 783 905 1,018 1,136 1,266 1,427 1,645 2,007 2,556 4,481 1,430
Source: NSSO, 70th
Round
Exhibit 91. Share of MPCE by category – Rural India
Rural 0-5 5-10 10-20 20-30 30-40 40-50 50-60 60-70 70-80 80-90 90-95 95-100 Overall
Cereals and pulses 24.0% 22.2% 20.8% 19.1% 17.9% 16.5% 15.5% 14.2% 13.1% 11.5% 9.4% 6.5% 13.7%
Oils and Spices 9.7% 9.2% 9.0% 8.8% 8.6% 8.4% 8.3% 8.0% 7.5% 6.7% 5.8% 4.3% 7.2%
Sugar & Salt 2.2% 2.3% 2.2% 2.2% 2.1% 2.1% 2.0% 1.9% 1.9% 1.8% 1.6% 1.2% 1.8%
Vegetables 10.0% 9.6% 9.1% 8.7% 8.1% 7.8% 7.3% 7.0% 6.6% 5.9% 5.2% 3.6% 6.6%
Milk+ 3.4% 4.8% 6.2% 6.4% 7.4% 8.0% 8.1% 8.7% 9.0% 9.5% 9.3% 7.4% 8.0%
Meat+ 2.7% 3.3% 3.9% 4.6% 4.9% 4.8% 5.4% 5.2% 5.1% 5.1% 4.8% 4.5% 4.8%
Fruits 0.9% 1.1% 1.5% 1.8% 2.1% 2.4% 2.6% 2.9% 3.3% 3.5% 3.8% 3.3% 2.8%
Beverages 7.7% 7.8% 7.6% 7.5% 7.8% 8.0% 7.7% 7.9% 7.8% 7.8% 7.7% 8.7% 7.9%
Food (total) 60.6% 60.2% 60.3% 59.2% 58.9% 58.0% 57.0% 55.7% 54.2% 51.8% 47.6% 39.5% 52.9%
Fuel 12.4% 11.4% 10.6% 10.2% 9.5% 9.1% 8.8% 8.4% 7.9% 7.4% 6.6% 4.5% 8.0%
Clothing & Footwear 8.4% 8.2% 7.9% 7.8% 7.6% 7.7% 7.7% 7.3% 7.1% 6.9% 6.5% 5.2% 7.0%
Medical 3.1% 3.8% 4.0% 4.7% 4.7% 4.9% 5.4% 5.5% 6.4% 7.2% 8.7% 11.0% 6.7%
Education 1.4% 1.6% 1.9% 2.2% 2.2% 2.5% 2.5% 2.9% 3.3% 3.9% 4.8% 6.2% 3.5%
Household consumables+ 4.6% 4.5% 4.5% 4.5% 4.4% 4.5% 4.6% 4.6% 4.6% 4.4% 4.3% 3.4% 4.3%
Consumer services+ 4.5% 4.8% 5.3% 5.8% 6.3% 6.8% 7.1% 8.0% 8.3% 9.4% 10.4% 11.0% 8.2%
Rent & taxes 0.1% 0.1% 0.1% 0.2% 0.3% 0.3% 0.4% 0.5% 0.6% 0.7% 1.2% 1.8% 0.7%
Entertainment 0.3% 0.4% 0.5% 0.6% 0.7% 0.8% 1.0% 1.1% 1.1% 1.2% 1.3% 1.1% 1.0%
Tobacco+ 2.9% 3.1% 3.0% 3.0% 3.3% 3.1% 3.2% 3.4% 3.4% 3.3% 3.2% 3.1% 3.2%
Consumer durables 1.7% 1.9% 1.8% 1.9% 2.1% 2.2% 2.4% 2.6% 3.1% 3.7% 5.5% 13.1% 4.5%
Total non-food 39.4% 39.8% 39.7% 40.8% 41.1% 42.0% 43.0% 44.3% 45.8% 48.2% 52.4% 60.5% 47.1%
Source: NSSO, 70th
Round
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 69
Appendix 4: Global agri-commodity price trend
Exhibit 92. Agri Commodity prices have remained weak, expected to rise as La Nina impact sets in
Global commodity prices have remained largely in a narrow
band over the past few years (excluding Copra) Cotton and wheat prices have declined in last one year
Source: Bloomberg
25
75
125
175
225
275
325
Sugar Wheat Cotton Coffee Tea Copra Palm Oil
-12.3%
9.2%
-7.8%
-12.9%
-1.1%
27.2%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
Cotton Sugar Corn Wheat Coffee Palm Oil
(%)
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 70
Notes
India Strategy – Rural Safari - III 4 May 2016
JM Financial Institutional Securities Limited Page 71
APPENDIX I
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