Rural economy is a structural story, buy for next 3-5 yrs: Nilesh Shah, Kotak AMC

In a chat with ET Now, Nilesh Shah, MD, Kotak AMC, says if there is a revival in the agriculture prices, then there will be more money flowing into the rural economy and there are a lot of rural facing companies benefitting from that. Edited excerpts

ET Now: Everybody believes that the space to be in for the next 12 months if you want to be a comfortable investor is consumption. Bet on anything which has got the consumer angle attached to it and it should do well. Is it that simple? The valuations are high.

Nilesh Shah: The valuations are high and that’s why you must pick up the right stocks. Today, fundamentals are improving for the consumption sector driven by good monsoon, Seventh Pay Commission, general feeling of upliftment or goodness prevailing among people. We have seen that demonstrated in the past in form of Onam festival in Kerala, Nuakhai in Odisha, Ganpati in Maharashtra, Durga Puja in Bengal. During this festival season, sales have picked up. If we see the numbers by e-comm sites, the numbers are really stunning. So, some momentum is seen but there is also a TINA (There is No Alternative) factor.

In private investment, things are not going to recover in a hurry. Many companies are burdened with debt, they are grappling with the execution on ground, environmental delays, project delays as well as infrastructure constraints. The investment is unlikely to take off in next 12 months and hence that flow is also coming into consumption where the momentum is building up.

ET Now: About a year back, all of us were gung-ho about urban consumption. We talked about how demand is only within the tier one cities but that clearly is not happening anymore. It is the rural recovery theme which is now playing out. We have seen that in the tractor sales numbers for Escorts and M&M. Clearly, big reason for that is the monsoon and that is coming after a gap of two years almost?

Nilesh Shah: Definitely the rural economy was constrained in last two years by below average monsoon. There were restrictions in terms of remittances which were sent by construction workers to rural economy as construction slowed down this remittances came down.

The third thing was related to MSP price increases. In order to control inflation, MSP price increases were not very large. The other thing that happened was related to lent prices in most rural parts of India and it is a vast place but broad indicators are available that the lent prices have slowed down and that took away the wealth effect. Put all these things together, rural economy was on the backfoot for last two years. Now good monsoon has changed things.

Second, the benefits of government spendings are also getting reflected in the rural economy. For example, the government came out with regulation which suggested that it should be neem coated. Now when you coat urea with neem, the movement of urea outside of farming is difficult. You cannot put that into milk for adulteration or similar things. Now suddenly it meant that more urea was available for farmers.
These kind of steps taken by the government and state governments has also helped the rural economy.

Now we are probably seeing that last two years suppressed demand getting recovered into rural economy. We have also introduced something called soil health card. Some 2 crore plus soil health cards have been given. I could be wrong on the number but the number is staggering.

For the first time, farmers are also getting proper guidance in terms of what crop they should take and in fact such steps have ensured despite two below average monsoon. the dip in the agriculture production was not that substantial.

The other thing which is a trend now in rural economy is that people are actually moving into value added products. It is no longer rice and wheat and jowar and bajra kind of cereals. It is also into vegetables and it is also into flowers and fruits. We have become one of the largest producers of vegetables and fruits in the world. The rural economy is on the way up and hopefully that should continue to give boost to the consumption over a period of time.

ET Now: How does one play this from the market’s perspective?

Nilesh Shah: The best time to play this was when the first forecast on monsoon came saying that after two years it will be above average monsoon. In that time, there was uncertainty, there was no clarity but that is why prices were cheap. Had you bought at that time, you would have been up 30-40% today. Now today you have clarity. You have clarity of good monsoon, you have clarity on many other things. So now you are not buying for next six months or twelve months, now you are buying for next three years or five years. Will the rural economy be structural story? My feeling is that it is going to be a structural story because a), agriculture is no longer dependent on monsoon as it was before. b) this time both kharif and rabi crop will see record production. C) in certain agriculture commodities like wheat, price is down about 30% year on year.

There are very few commodities like cotton and sugar which are up year on year. If there is a revival in the agriculture prices, then there will be more money flowing into the rural economy. So now you are again playing for next three years-five years rather than next six months and certainly you have a host of companies available which are exposed to rural segment. It could be FMCG company. it could be farm equipment company, an agrochemical company a rural facing NBFC or even an ancillary company focussed more on rural areas.

ET Now: A lot of people would be wary investing from a three-five-year perspective because they would think that what if monsoons next year are not good? The sense that I got via interactions with certain people in the government this year was that they have readied the plan wherein via technology, they will try ensure that even if the monsoons were not adequate next year, there will be enough water available for plant irrigation and agriculture. Have you heard anything to that effect?

Nilesh Shah: Is the irrigation project getting completed"? Instead of running 20 irrigation projects. let us focus on completing five and see the benefits reach to people. Yes there is increased awareness about that and everyone is working at the central government, at the state government but my point is that look as an equity investor you have to take a call, you have to take the risk, who knows what will happen to next year’s monsoon. Now if you believe stock prices have corrected, then you have to buy more. So please do not wait for every data to turn positive and then go to buy, then the prices will move up. You have to take risk. Equity is not free lunch. You make money because you take risk.