You are currently viewing How to play potential rural bounce-back

How to play potential rural bounce-back

  • Post author:
  • Post category:Posts

Hindustan Unilever, the barometer of India’s rural and urban consumption, has been an underperformer among the large-cap stocks in 2023. The share price fell 2.5%, while the NSE Nifty gained 6.5% since January 2023. That shows investor concerns about future profit growth in light of a sluggish demand in rural India. In a conference call recently after announcing the quarterly results, the company highlighted that consumers in rural India are yet to see a fall in inflation. The company is witnessing a very gradual increase in the sales volume. The price increase over the past three years is 25%. Wages in rural India have not managed to keep up with the rise in prices of consumer products.

A similar sentiment was echoed by the managed by TVS Motors, the two-wheeler company. Prices of entry-level two-wheelers jumped 40% over the past year. These are the most sold bikes and scooters in rural India. Since wages have remained stagnant due to an uneven distribution of the monsoon, it has affected the affordability of two-wheelers.  

Companies credited the central government for expanding the scope of the capital expenditure on infrastructure. However, the impact on incomes is yet to be seen on rural expenditure and demand. Most companies hope that consumer price inflation remains subdued and rural wages grow steadily to enhance the affordability of consumer products and durables. Over the years, rural consumption has remained the bedrock of the consumption story. That was even when the industrial output in urban areas suffered before the lockdown. Things turned worse during the lockdown phase. 

However, the tide seems to be turning. The latest automobile sales data shows an uptrend in rural demand. The growth at a faster clip in October 2023 was attributed to a buoyant growth in rural demand.

A new analysis by India Ratings, an affiliate of global ratings agency FITCH, shows that states have pushed capital expenditure on infrastructure in 2023-24. The fiscal data for 23 states for April to September 2023 reveals that the aggregate capex of all states combined rose to a seven-year high of 1.8% of GDP.

“That states, like the union government, are front-loading their capex is a positive development for the economy, as the multiplier effects of their capex are considered to be higher than that of the union government,” the agency said in the latest release. The exciting aspect is that states like Uttar Pradesh, Madhya Pradesh, Odisha, Bihar and Telangana are leading the surge in capital expenditure. That is good news for the prospects of rural demand.

Companies that rely on rural consumption for growth have underperformed in 2023. Despite a recent rally in the stock market, corporate results announced by companies are a mixed bag. For faster productivity growth, both rural and urban consumer demand must grow. You need to align your investments to a basket of stocks that could benefit from this turnaround. You could either identify that yourself or use technology to help you.

Thank you for reading this post, don't forget to subscribe!