17th Feb, 2009

Sector and stock Picks- Agriculture

In India more than 65 per cent or 13.5 crore households live in rural areas. A large population also means a lot of opportunities for companies serving the needs of these individuals. India has a lot of untapped business opportunities in the vast rural domain. For instance, the Indian wireless business has grown the fastest in the world, thanks partly to low penetration levels in the country. Even after many years of high growth, the mobile penetration is still low at less than10 per cent in rural India, thus reflecting the untapped potential.

Over the last one decade (FY 1998-2008), India’s per capita income has more than doubled from $418 to over $1,000. On an average, the per capita income in rural India has grown by 4 per cent annually—or by 50 per cent in ten years. Among key reasons for the latter are the rising commodity prices (Minimum Support Price; MSP for crops), better resource utilization, improving productivity and higher production.

The political leadership can not ignore the rural segment because of the main vote bank. The government is elected by majority of rural voters and hence their interest can  not be sidelined.

Going forward as well, the prospects look better given the government’s emphasis on agriculture growth and rural India. The fiscal incentives such as priority lending to the farm sector, subsidy on farm equipment and agri-inputs and, last but not the least, the Rs 71,000 crore farm-loan waiver are some of the initiatives.

There has been a sharp increase in MSP for many crops in the last two years, more particularly in the last years, which should boost overall farm incomes going ahead. This also means more spare cash to spend by the rural population

The increasing availability of basic infrastructure (roads, water, electricity, telephone), improving access to funding, employment guarantee schemes, better information systems and growing literacy are together helping bring prosperity to rural households including the non-agriculture (accounting for about 35-40 per cent) population that reside in rural India.

The frontline economy has suffered because of the global meltdown and long period of uncertainty is ahead thus investing in companies that cater to the needs of rural India, and are likely to benefit on account of the increasing rural consumption and capex growth is a good strategy.

Stocks to watch:

 BHARTI AIRTEL:

Bharti Airtel is India’s largest mobile phone company. With urban markets reaching saturation levels, the company is looking at penetrating the ‘B’ and ‘C’ circles or rural markets for growth. For the December quarter, over 55 per cent of the company’s net subscriber additions of 2.73 million were from rural areas. In addition to tying up with co-operatives such as IFFCO, to attract the rural consumer, the company offers agri-related information such as commodity prices, weather updates and farming techniques. The company’s expansion into ‘B’ and ‘C’ circles is to get a bigger pie of a market, which is expected to more than double to 250 million by FY12 from 100 million currently. Interestingly, even with 250 million subscriber base in FY12, the penetration of mobile telephony in rural India would still hover around 30-33 per cent (now under 10 per cent) as compared to 70-100 per cent currently in metro and ‘A’ circles. With increasing rural incomes, expect the penetration levels to move up further, thereafter.

While the company’s expansion deeper into rural segment will help it boost volume growth, it is likely to lead to sharp falls in average revenues per user (ARPUs) as competitors drop prices to attract subscribers. ARPUs, which were at Rs 355 levels a year ago and at Rs 321 now, would continue to trend down, as more price-sensitive rural consumers are added to its existing base. More importantly, margins have ranged 30-31 per cent in the last three quarters, helped by higher base and sharing of infrastructure. The company’s urban focus will continue to revolve around services of its Telemedia division, which includes DTH, IPTV, Broadband, fixed line an