Investors to shift exposure to companies with businesses primarily in urban areas

ET Intelligence Group: With the job market likely to show signs of revival, urban consumption growth could race ahead of rural demand over the next few years, prompting investors to increasingly shift their exposure to companies with businesses primarily in urban areas. These include companies such as Jubilant Foodworks, United Breweries, Titan, Maruti Suzuki and Eicher Motors.

Rural consumption played its part in the past five years, driving the Indian economy: rural consumption has grown at 14.3% since 2005, outpacing urban consumption, which grew at 13.3%. However, in the next few years, although rural consumption will continue to grow, analysts expect urban consumption to fire up growth.

“Our channel checks suggest that campus hiring in key engineering and business schools has been better than in the previous year. Secondly, a fall in interest rates would boost urban demand,” says Jyotivardhan Jaipuria, research analyst with DSP Merrill Lynch, in one of his recent reports. He added that growth in rural wages may be moderate, going forward, as GDP growth has slowed down and government spending on schemes such as the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) has plateaued off.

A lead indicator to this would be the Naukri Job Speak index, which has grown 33% in the past one year compared with 6.5% CAGR from FY10 to FY13. At the same time, the sharp rise in the MSP (minimum selling price) of the crops (10.5-14% CAGR from FY07-FY13 against 2-3.5% from FY01-FY07) could reverse.

In FY14, the government increased the MSP by less than 5%; this was marginal compared to the previous years. All this could lead to a re-rating of consumer stocks such as Jubilant Foodworks, United Breweries and Titan and could see earnings upgrades in Maruti Suzuki and Eicher Motors, which have significant exposure to the urban markets compared to companies such as HUL, ITC, Emami, Mahindra & Mahindra and Hero.