Brokerages bet on rural-focused sectors

Key Highlights

• CLSA expects 2018 to witness a pick-up in demand driven by recovering consumer sentiment
• JM Financial expects govt will further enhance its focus on agri/rural sector
• According to Edelweiss, revenue and EBITDA in consumer segment to jump 10.0% and 12.5%, respectively, YoY

With the impact of demonetisation and goods and services (GST) waning, sectoral reports suggest 2018 to witness a pick-up in demand driven by recovering consumer sentiment.  

"After a challenging last year, we expect 2018 to witness a pick-up in demand driven by recovering consumer sentiment, a supportive base, lower prices following GST-rate cuts and a return to normalcy for channels. The rise in oil prices and related derivatives is a worry but we forecast margins to sustain led by product price hikes, portfolio premiumisation, cost savings and sales volume recovery," a CLSA report said.  
"We also see a case to be more positive on rural India giving rising gov’t spending and general elections in 2019. ITC, Emami, GSK, Varun Bev and Jubilant
remain BUYs. Key rating changes are in Asian Paints (U-PF to BUY), Titan (BUY to O-PF), GCPL (U-PF to O-PF), Kansai Nerolac (BUY to O-PF)."

JM Financial expect that the government will further enhance its focus on spending towards agri/rural themes. Rural spending will get boost from farm loan waivers (Rs 1.2 tn) already announced in 5 states and currently at various stages of disbursement, a JM Financial report said. 

"Among our model portfolio beneficiaries from higher spending include Mahindra Finance (MMFS), United Phosphorus (UPL), among others," the report said.

After 4 quarters of muted growth, the consumer goods sector is likely to clock high single to low double digit volume growth in Q3FY18, Edelweiss said in a report. The
Edelweiss consumer goods pack’s revenue and EBITDA are likely to jump 10.0% and 12.5% year on year (Q2FY18: 6.4% and 10.5%), respectively. 

Volumes of consumer goods companies, which rebounded marginally from GST-related destocking in Q2FY18, is likely to resort to near normalcy. While Colgate, Dabur, HUL, Britannia, Bajaj Corp, GCPL (domestic business) and Marico (Parachute) are likely to post low double digit volume growth, Emami is likely to report high single digit volume growth, the report said. 
"We expect ITC to post 2% decline in its cigarette business on a flat base. We expect United Spirits’ Prestige & Above segment to post ~5% volume growth. With GST pangs largely behind, we expect volumes of most companies to clock high single to low double digit growth." 

Despite significant domestic flows, India just performed in line with emerging-market peers as foreign investors lowered their 2017 weighting for the country due to expensive valuations, downward EPS revisions and better alternatives elsewhere. We expect the earnings trajectory to improve meaningfully this year with disruptive changes like demonetisation and GST implementation behind us and as a solid foundation for long-term improvement in economic growth rates and corporate profitability has been laid, a CLSA report said. 
Large equity raisings and bank recapitalisation should help accelerate a cyclical recovery. Fiscal concerns and politics are key risks in 2018.

Although potential Fed balance-sheet shrinking remains a risk for global liquidity. Rising oil prices and the positive performance of global internet stocks worked against India. A rotation out of tech names should help Indian equities outperform. 

"We build in US$8-10bn of net inflows from foreign investors in 2018 compared to the lacklustre US$3bn per annum over the past three years. Large equity raisings to help revive capex, domestic flows to help. After a record FY18 equity raising of Rs2.0 tn ($30bn), FY19 could also follow suit."

"A property market turnaround in 2018 is likely after almost six years of stagnation, with end users driving volume. Best-in-two-decades affordability and government support for housing demand should trigger a rebound. We expect the Real Estate Regulatory Act (Rera) to boost consumer confidence and propel a visible uptick in the housing cycle.  With nearly 50% of non-performing loans (NPLs) to be resolved, bank NPL ratios will fall YoY in FY19 and further in FY20. We believe provisioning will also be lower in FY19 YoY. Expect only moderate market returns."

"We expect Nifty earnings to dramatically improve from a 4% compound annual growth rate over the past five years to 15-20% over the next two years as corporate earnings return to normal. Our
December 2018 Nifty target of 11,400 offers a 10% total return, building in a 10% derating from the current 17.9x. Key risks to the market are potential fiscal slippage
driving bond yields up further, higher equity taxes and political uncertainties ahead of the national elections in 1H19," the report said.