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Rural Safari – III Our third journey took us through the lake city of Bhopal, palace city of Mysore and to the drought hit regions of Marathwada among others enabling us to understand recent rural economy trends and identify key growth drivers. Our analysts covered 14 districts across 8 states that account for 52% of India's agri GDP. We present the key findings from rural India in this report.

All eyes on monsoon:

Deleveraging to precede big-ticket spending

Stocks mentioned: Hero Motocorp Mahindra Finance

JM Financial Institutional Securities Limited 4 May 2016

India Strategy – Rural Safari - III 4 May 2016

JM Financial Institutional Securities Limited

Table of Contents

Contents Page No.

Focus Charts 5

About Rural Safari 8

Farm income trends and current outlook 10

Good monsoon would boost farm income 13

Non-farm income remains supportive 18

Financial inclusion 25

Increasing indebtedness in Rural India 30

Deleveraging and small ticket purchases to take front stage 34

Sector Comments

Consumer goods 38

Automobiles 42

NBFC 51

Cement 57

Company Sections

Mahindra Finance 59

Hero Motocorp 62

Appendix I 65

Appendix II 67

Appendix III 68

Appendix IV 69



Deleveraging to precede big-ticket spending

Our rural survey I and II conducted in FY15 and FY16 had alerted to the

possibility of weak rural consumption due to declining incomes and waning

wealth in rural India. In this report, we present the findings of our third

rural survey, where we observe that a) farm incomes have fallen further, b)

asset values (especially land prices and transactions) are mostly stagnant

(except in select places), c) debt/assets of farmers have likely risen by 200-

300bps over past 3 years. On the positive side, we note a) Rabi crop

production could be higher YoY though short of govt. estimates, b)

infrastructure/ irrigation spending is supporting non-farm income

(something that we did not see 6 months back) and c) run-rate of loan

recoveries has increased YoY in places where there are no drought-like

conditions. In our view, a normal monsoon has the potential to increase

farm incomes by 20+% YoY in FY17 while higher rural spending by

governments should support non-farm income. But given the increase in

leverage and still very weak real estate markets, we expect the initial

savings to go into deleveraging and small ticket purchases. We prefer to

play the deleveraging through Mahindra Finance and discretionary via Hero

Motocorp. Interestingly, we note that the “Patanjali” phenomenon is not yet

that deeply penetrated in rural India and might still be an urban+Tier-2/3

cities phenomenon.

Lack of water, unseasonal rain affects ongoing Rabi crop: Decline in

ground water level (20%YoY lower reservoir levels during sowing) has

affected yield and quality of crop, and unseasonal rains during mid-march

added to the burden. Hence, there is a downward risk to the 2nd

advance

government production estimate (in Feb’16) of Rabi crop (Exhibit 3). Our

rural survey also confirms possibility of a downward revision though the

production is likely to be higher YoY.

Outlook on farm income (36% of rural): We estimate low productivity, weak

MSP growth and lower net sown area to have negatively affected farm income

(-7% YoY) in both FY15 and FY16. Farm income could grow by 20% in FY17

on the back of a) yield reverting due to good monsoon (as predicted by IMD),

b) supportive MSP prices c) benign rural wage growth (4.8%YoY in Dec’15).

Outlook on non-farm income (64% of rural): The recent pick up in

spending on job guarantee programs (2HFY16 higher by 11% HoH), irrigation

(state govt) and rural development (road construction) has supported non-

farm income by holding up wages, tractor demand and sub-contracting

works given to small section of farmers. With restart of sand mining, non-

farm income has been supportive to total rural income. Going ahead, with

states continuing to spend on agriculture, irrigation and rural development

(exhibit 7), we believe the share of non-farm income is likely to increase.

Deleveraging and small ticket purchases to take precedence: Over past 3

years, we estimate debt/assets for rural households to have risen from 7.5%

to 9.8% with highest increase amongst smaller farmers (exhibit 54). Going

forward, we estimate savings from initial crops to go towards deleveraging

and small ticket purchases. We prefer to play the initial stage of rural

recovery through Mahindra Finance (improvement in recoveries and NIM

expansion to lead to strong 30% EPS CAGR over FY16-18E) and Hero

Motocorp (upside risks to earnings on the back of increase in volume

growth). 1.

Other interesting findings: We noticed that Patanjali is now an urban +

rurban phenomenon, with penetration in rural India building up and posing

risks to FMCG sector. Secondly, we came across usage of technology by

Panchayats to efficiently deliver government services (Box 7), usage of DBT

in reducing leakages for student scholarship schemes and farmers taking on

contracting jobs for irrigation works to boost their income (Box 3).

Suhas Harinarayanan

[email protected]

Tel: (91 22) 66303037

Arshad Perwez

[email protected]

Tel: (91 22) 66303080

Loganathan B

[email protected]

Tel: (91 22) 66303351

Shyam Sriram

[email protected]

Tel: (91 22) 66303077

Varsha Bhansali

[email protected]

Tel: (91 22) 6630 3372

Ambrish Mishra

[email protected]

Tel: (91 22) 66303019

Richard Liu

[email protected]

Tel: (91 22) 6630 3064

Vicky Punjabi

[email protected]

Tel: (91 22) 6630 3065

Karan Uberoi

[email protected]

Tel: (91 22) 66303082

Nikhil Walecha

[email protected]

Tel: (91 22) 6630 3027

Kunal Randeria

[email protected]

Tel: (91 22) 66303075

Exhibit 1: JM Analysts covered 8 states,

which account for 52% of agriculture

GDP

Source: JM Financial

India Strategy

13 November 2015

India | India Strategy

4 May 2016

JM Financial Research is also available

on: Bloomberg - JMFR <GO>,

Thomson Publisher & Reuters,

S&P Capital IQ and FactSet

Please see Appendix I at the end of this

report for Important Disclosures and

Disclaimers and Research Analyst

Certification.

.

http://jmflresearch.com/JMCRM/analystreports/analyst%20documents/India_Strategy_Rural_Safari-2_13Nov2015.pdf



Exhibit 2. Eight states, 14 districts, 2,200+ Kilometers

Amritsar

Amritsar, located at India-

Pakistan border is a major

religious, commercial

centre. Sikhs’ holiest

shrine - Golden Temple is

located in the city,

making tourism one of

the largest industry here.

Wheat, Rice, Maize and

Potato are key crops

Varanasi/Chandauli

Varanasi is the largest

trading hub for agri-

commodities in eastern

UP and a famous religious

tourist destination.

Wheat, Paddy, Bajra,

Arhar, Sugarcane and

Potato are key crops in

the region

Firozpur

Firozpur is the largest

district of Punjab on the

Indo-Pak border. The

district has 73% rural

population with major

dependence on agriculture.

Key crops are Wheat,

Cotton, Maize and

Vegetables

Patna

Patna, the capital of Bihar,

is a city with many

religious attractions. 57%

of population in the

district is rural and

Paddy, Wheat, Arhar,

Gram, Bajra, Barley, and

Chillies are key crops

Bhopal

Bhopal is the capital city of

Madhya Pradesh and is

also called city of lakes for

its various natural as well

as artificial lakes and is

also one of the greenest

cities in India. Key crops

are Wheat, Gram, Lentil,

Peas, Linseed and

Soyabean

Warangal

Located in Telangana,

Warangal was earlier the

capital of Kakatiya

dynasty. The region

depends primarily on

monsoon and seasonal

rainfalls besides the

Kakatiya canal. Today, it

is one of the 100

proposed smart cities.

Major crops are Paddy,

Cotton, Mango and Wheat

Raisen & Sehore

Raisen is a rural district

about 50km from capital

city Bhopal (78% rural

population). It has many

tourist attractions

including Buddhist Sanchi

Stupa. Wheat, Soyabean,

Rice, Gram, Lentil, Maize,

Vegetables are the key

crop. For Sehore district,

adjacent to Bhopal, key

crops are Wheat, Gram,

Lentil, Peas and Linseed

Mysore

Located at the foot of

Chamundi hills, Mysore is

the 3rd most populous city

of Karnataka. Globally

renowned for its palaces, it

served as the capital city

of Kingdom of Mysore for

6 centuries. While tourism

is the major industry,

predominant crops are

Paddy, Jowar, Ragi, Cotton,

Tobacco and Maize

Aurangabad

Located near Godavari

basin, the city is named

after Mughal emperor

Aurangzeb and is a major

tourism hub with some of

UNESCO World heritage

sites. Agriculture is well

diversified with wide

range of crops like Jowar,

Pearl Millet, Wheat, Gram,

Soyabean and Cotton

Mandya

A prominent agricultural

district of Karnataka,

Mandya is situated near

river Cauvery and almost

half agricultural land

receives irrigation from

Krishna Raj Sagar and

Hemavathi. Major crops

include Paddy, Sugarcane,

Ragi and Horsegram

Ahmadnagar

Ahmadnagar is a rural

district of Maharashtra

(80% rural population)

situated in the

Marathwada region. Key

crops in the region are

Jowar, Sugarcane, Wheat,

Gram and Cotton. The

district has been facing

severe water shortages

due to drought conditions

Coimbatore

Coimbatore is the second

largest city in Tamil Nadu,

after Chennai. It is a major

industrial hub. The district

has rural population of

24% and key crops are

Paddy, Jowar, Maize, Gram,

Sugarcane, Chillies and

Coconut

Source: Company, JM Financial



Focus Charts…

Exhibit 3. We travelled to 8 states with majority of them suffering higher rainfall deficit than national average

Travelled to 8 states accounting for 52% of agri-GDP

Our survey indicates high probability of downward revision to

2nd

advanced estimates of Rabi production

States visited Share of

agri-GDP

Monsoon

Deficit (%)-

2014

Monsoon

Deficit (%)-

2015

UP 13.0% -49% -45%

Maharashtra 8.4% -20% -26%

Madhya Pradesh 7.3% -21% -14%

Karnataka 5.4% 4% -24%

Bihar 4.8% -17% -28%

Punjab 4.7% -50% -32%

Telangana 4.6% -34% -20%

Tamil Nadu 4.2% -1% -10%

Total 52.3% -12% -14%

Source: Rural Safari, Note: Second advanced estimates of Rabi output as released during Feb 2016

Exhibit 4. Crop yields have declined over the past few years; however, a good monsoon can lift yields in FY17

Based on our survey and analysis, crop yield declined during

last two years

IMD has predicted 106% of normal rainfall in 2016 (1st

forecast)

Source: Rural Safari, IMD

Exhibit 5. Agri commodity prices have always increased during the periods of La Nina

Post hitting the maximum, Oceanic Nino Index has started to

decline indicating the end of El Nino

Agri commodity prices across monsoon periods

Source: Rural Safari, Oceanic Nino Index, Climate Prediction Center

3.9%

8.4%

-7.6%

-15.2%

0.4%

-4.4%

-11.8%

-20%

-15%

-10%

-5%

0%

5%

10%

Cereals Wheat Rice Coarsecereals -

Total

Pulses Sugarcane Cotton

2015-16 Rabi Crop forecast - YoY (%)

10.0

11.0

12.0

13.0

14.0

15.0

16.0

2010 2011 2012 2013 2014 2015 2016

Rice Wheat(qtl/acre)

-7.0%

-20.6%

2.2%

-12.5%

-0.5% -0.6%

5.3%

-1.9%

-22.5%

2.6%1.0%

-7.9%

5.2%

-12.6%-14.5%

6%

(0)

(0)

(0)

(0)

(0)

0

0

0

2001 2004 2007 2010 2013 2016

% Monsoon Deficit (%)(%)

(2.0)

(1.0)

0.0

1.0

2.0

3.0

Feb-02 Nov-03 Aug-05 May-07 Feb-09 Nov-10 Aug-12 May-14 Feb-16

(%)

0

0.2

0.4

0.6

0.8

1

0

50

100

150

200

250

300

350

400

450

Jan-01 Jan-04 Jan-07 Jan-10 Jan-13 Jan-16

La Nina El Nino Cotton Wheat Corn(%)



Exhibit 6. While realization has declined over the past 3 years, better monsoon should aid realization and profitability

going forward

Last 3 years MSP growth has been low; likely to remain in

mid-single digits in FY17

Driven by improvement in yield and slow wage growth, we

expect realization/cost to bottom out in FY16

Source: CMIE, Rural Safari

Exhibit 7. Non-farm income will remain supportive of total income on the back of government spending while wealth

effect has completely waned in the past 3 years

Rural related capex for states have been on the rise with

centre also stepping up capex

Wealth effect has tapered off as land prices are stable/down in

most places we visited

State Real estate trend

Uttar Pradesh

Maharashtra

Madhya Pradesh

Karnataka

Bihar

Punjab

Telangana

Tamil Nadu

Source: State Budgets, Rural Safari

Exhibit 8. Significant difference in water requirement among crops - renders certain states much more vulnerable to

monsoon than others

Water requirement of major crops Variation across states’ dependence on monsoon

Crop Water

Requirement (mm)

Crop Water

Requirement (mm)

High Water Requirement Moderate Water requirement

Sugarcane 1,500-2.500 Pepper 600-900

Cotton 700-1300 Potato 500-700

Sunflower 600-1000 Maize 500-800

Low Water Requirement Rice (paddy) 450-700

Cabbage 350-500 Tomato 400-800

Onion 350-550 Barley/Oats/Wheat

450-650

Pea 350-500 Soybean 450-700

Source: FAO, NSSO,JM Financial

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2012 2013 2014 2015 2016

Paddy MSP - YoY (%) Wheat MSP - YoY (%)

Wage growth - YoY (%)

1.0

1.4

1.8

2.2

2.6

3.0

2005 2007 2009 2011 2013 2015 2017

Rice Wheat

(Realization/Cost per acre)

10%

30%

93%

21%

10%14%

0%

20%

40%

60%

80%

100%

Gujarat Karnataka Telangana Rajasthan Punjab Tamil Nadu

Rural Related Capex (%YoY)(FY'17 growth)

Cutivation Income Irrigation Cover Water Intensity of crop Farm VulnerabilityAP

Bihar

Gujarat

Haryana

Karnataka

Maharashtra

MP

Punjab

Rajasthan

TN

UP

Good Moderate Bad



Exhibit 9. Lower income in the past 3 years have affected the consumption in Rural India

Reduction in frequency of consumption and delay in

purchasing is evident in weak volume growth of rural stocks

Good monsoon plays a crucial part in determining rural

consumption

Source: NSSO, RBI, Company Data, JM Financial

Exhibit 10. Weak base and good monsoon are expected to support income growth and help repair rural balance sheet

Agri income is expected to rise as non-agri remains

“supportive” for a robust total income growth

Weak income levels have affected the balance sheet of farmers

as debt ratios increased in the last 3 years

Source: NSSO, NDDB, Rural Safari, Note: An average farmer with 1.1ha land holding

Exhibit 11. Deleveraging and small ticket purchases to take precedence

Given the high leverage we expect building up of savings and

deleveraging to be the first activity

Given the pressure on land prices, consumption elasticity

would decline in short term leading to delay in big ticket

purchases

Source: NSSO, MOSPI, Rural Safari

(40)

(20)

0

20

40

60

1QFY10 1QFY11 1QFY12 1QFY13 1QFY14 1QFY15 1QFY16

HUL 2W Tractor(%)Monsoon Rural Credit Growth Tractor Volume Growth 2W Volume Growth

CY05

CY06

CY07

CY08

CY09 Loan Waiver Scheme Loan Waiver Scheme

CY10 1st year of New Govt.

6th pay commission

1st year of New Govt.

6th pay commission

CY11

CY12

CY13

CY14

CY15

Good Moderate Bad

-1%

16%

7%

-7%

11%

2%

-7%

6%

0%

20%

6%

12%

-10%

-5%

0%

5%

10%

15%

20%

25%

Agri income growth Non-Agri income growth Total income growth

FY14 FY15 FY16 FY17E(%)

7.5% 7.5%

8.3%

9.8%

10.2%

8.0% 8.2%

8.4%

9.0%

8.3%

6%

7%

8%

9%

10%

11%

FY13 FY14 FY15 FY16 FY17E

Debt/Asset Interest / income(%)

7.5%

8.3%

9.8% 9.7%

0.5%

6%

7%

8%

9%

10%

11%

FY14 FY15 FY16 FY17E

Debt/Asset(%)

6.4

10.7

17.4

11.6

13.6

17.6

0.6

0.8

1.0

0.0

0.2

0.4

0.6

0.8

1.0

1.2

0

4

8

12

16

20

FY94-05 FY05-10 FY10-12

MPCE Rural per capita GDP Multiplier (RHS) (x)(% CAGR)



About Rural Safari

8 States, 14 districts and 2,200+ Kilometers

In continuation of our efforts to understand rural India, our analysts left their

desks and went out to the rural hinterland in sweltering heat and sun. We

travelled more than 2,200kms, covering 14 districts across 8 states of India to

meet a variety of stake-holders. We met farmers – large and small, small business

owners, FMCG dealers, auto dealers, bank managers, small shop and service

owners among others. We looked at how rural demand has been impacted by the

crop failures during last two years, what are the key concerns of rural population

and what is their spending outlook. We also looked at how efforts on cash

transfer, financial inclusion etc. are making an impact on rural economy. We also

probed the impact of “Patanjali” brand usage across our travels.

Exhibit 12. Our travel took us to states accounting for more than 50% of India’s agri-GDP

States where we went and their share in agriculture GDP Interacted with a variety of stakeholders in rural India

Source: Rural Safari

Exhibit 13. Stark variation across the country – Rain-fed/irrigated areas show normal output, while others suffer steep

decline in farm output

Fields with near normal wheat crop in Madhya Pradesh

Quite a difficult period in the Marathwada region of

Maharashtra


UP, 13.0%

Maharashtra, 8.4%

Madhya Pradesh, 7.3%

Karnataka, 5.4%

Bihar, 4.8%

Punjab, 4.7%

Telangana, 4.6%

Tamil Nadu, 4.2%

52.3% of agriculture GDP of India

Farmers

Agri-Labourer

Agri Mandi operator

FMCG dealer

Auto Dealer

SMEs

Politician



IMD predicts above normal monsoon in 2016

Post 2 seasons of deficit monsoon, IMD predicts monsoon to be above

normal for the upcoming season. With Indian agriculture still dependent on

monsoon rains (only 46% of net sown area irrigated) a substantial portion of

agricultural land in India still remains rain-fed. With higher probability of

“above normal” rainfall (34 percent) and normal rainfall (30 per cent) there is

growing optimism that domestic consumption demand will pick up,

particularly in rural India, and help fasten the pace of economic growth.

IMD (first prediction, April) predicts the upcoming season to have above normal

rainfall at 106% as the effects of El Nino rolls back. In the recent history

predictions of IMD has been with better accuracy compared to the previous

decade (2001-2010). Second prediction of monsoon will come in June’16.

Exhibit 14. IMD predicts upcoming monsoon to be above normal

Monsoon deficit/surplus in the last 15 years IMD prediction accuracy has increased in recent past

Source: IMD, CMIE, Note: Accuracy measured against first IMD prediction (Apr)

With large portions of land still dependent on good monsoon rains, the

correlation between agri-GDP and quantum of rains has a strong positive

correlation. With prediction of an above normal monsoon, agri-GDP could get a

boost post 2 years of sluggish growth.

Exhibit 15. Monsoon showers and agri-GDP have high correlation


-7.0%

-20.6%

2.2%

-12.5%

-0.5% -0.6%

5.3%

-1.9%

-22.5%

2.6%1.0%

-7.9%

5.2%

-12.6%-14.5%

6%

(0)

(0)

(0)

(0)

(0)

0

0

0

2001 2004 2007 2010 2013 2016E

% Monsoon Deficit (%)(%)

-5.1%

-21.4%

6.5%

-12.5%

1.5%

6.9%

10.8%

-0.9%

-19.3%

4.7%3.0%

-7.0%

7.4%

-8.0% -8.1%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

2001 2003 2005 2007 2009 2011 2013 2015

Difference in IMD forecast and actual rainfall (%)

(15)

(10)

(5)

0

5

10

15

20

(30) (25) (20) (15) (10) (5) 0 5 10 15 20 25Rea

l Ag

ri-G

DP

gro

wth

(%)

Rainfall - % deviation from LPA

IMD has predicted 106% of normal rainfall in

2016 (first prediction), second prediction about

monsoons would come in June of 2016

Above normal rainfall would boost agri-GDP as

correlation between agri-GDP and quantum of

rain has steep positive correlation



Farm income trend and current outlook

Despite declining share of farm income in rural India (approx. 1/3rd

),

agriculture continues to be one of the major drivers of rural economy as

farming still employs c.50% of labor force in India. Therefore, farm income is

of critical importance for any recovery in rural spending.

Last two years (2014 and 2015) have turned out to be weak in terms of

agricultural produce as well as realizations - low MSP growth, weak global

commodity prices impacting market prices of cash crops. Even wage rate

growth has reduced from earlier double digit growth levels, thereby

accentuating impact on marginal farmers as well.

Two consecutive monsoon deficits (2014 & 2015) and unseasonal rains in

Feb-Mar 2015 have led to 3 consecutive crop declines.

During 2014 and 2015, monsoons were lower by 12%/14% from the long period

averages. The coverage of irrigation is only c.46% for the country, and thereby

lack of rainfall directly impacts crop output. As a result of weak monsoon and

accentuated by unseasonal rains in Feb-Mar 2015, Indian agriculture has seen

overall three consecutive bad crops (Kharif 2014 & 2015), and Rabi 2015.

Exhibit 16. Two consecutive monsoon deficits – with some states receiving

20%+ below normal rainfall

Source: CMIE, IMD

Exhibit 17. Three consecutive crop failures in last two years have set a weak back-drop for agriculture income

Production declined in last two Kharif crop cycles

2015 Rabi output was additionally impacted by unseasonal

rains in Feb-Mar 2015

Source: CMIE, Note: 2015-16 4th

Advanced estimates

-7.0%

-20.6%

2.2%

-12.5%

-0.5% -0.6%

5.3%

-1.9%

-22.5%

2.6%1.0%

-7.9%

5.2%

-12.6%-14.5%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

2001 2003 2005 2007 2009 2011 2013 2015

Monsoon Deficit/above normal (%)

-0.3% -0.1%-0.8%

-4.4%

-15.1%

-2.8%

-0.9%

-8.6%

-6.5%

-8.4%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

Cereals Rice Coarse-cereals Pulses Major Oilseeds

2014-15 - Production -YoY (%) 2015-16 production - YoY (%)

-8.6%-9.7%

-7.0%

-1.4%

2.9%

-3.1%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

Cereals Wheat Rice Coarsecereals -

Total

Sugarcane Cotton

2014-15 - YoY (%)

3 Consecutive crop declines have adversely

impacted farm-income



Exhibit 18. More than half of Indian farms are still not covered under irrigation

Net irrigated area increased from 18% at time of

independence to 46% (net irrigated) by 2012

Irrigation in India has expanded on account of investment in

tube-wells – Sources of irrigation share (%)

Source: CMIE

How has been the current Rabi crop output (2016) and pricing trend?

After 3 consecutive crop weakness (output declines), our visit indicated an initial

trend of likely moderate decline in crop output during Rabi 2016 season (Nov-

Apr 2016) as well. The primary causes for weakness in crop output stem from –

(a) two years of deficit rains (2014 and 2015) which have led to ground-water

depletion and thereby less water for irrigation, and

(b) Unseasonal rains impact (mid-March 2016)

The key crop of Rabi season (wheat) needs 3-4 times irrigation during the crop

cycle. Therefore, states/areas with irrigation facilities reported normal yields

(Punjab), while we noted decline in yields of up to 20-30% YoY in some places of

UP and MP. Ground-water level has gone down significantly, as is reflected in the

lower water storage across the country (c.30% YoY lower in second half of April

2016).

Exhibit 19. Reservoir levels indicate decline in water levels during 2016

Due to two years of deficient rains (2014, 15) water levels

continued to deplete and have impacted Rabi crops

Reservoir level depletion is directly correlated with previous

year monsoon

Source: CMIE, Note: LPA- Long Period Average

18

46

-

5

10

15

20

25

30

35

40

45

50

Irrigated area as % of net sown area

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Tube-Wells Canals Other Wells Tanks Other Sources

1951 1961 1971 1981 2001 2012

Tube- wells have become the key source of irrigation in India

0

10

20

30

40

50

60

70

Reservoir current Storage as % of Live storage

Live storage continues to deplete

0

20

40

60

80

100

120

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

Reservoir levels - As % of live storage at Full Reservoir Level

Rainfall - % of LPA (previous year)

Lack of sufficient water for irrigation due to

two bad monsoons and unseasonal rains in Feb-

Mar 2016 have put downward pressure on Rabi

2016 crop output



Unseasonal rains during later part of Rabi season (Feb-April) proved to be

detrimental as the crop quality gets adversely impacted (it does not develop

properly). We had seen massive impact of unseasonal rains during Feb-Apr 2015,

which drove down Rabi output in 2015 (c.10% YoY decline in wheat production).

Again, in 2016, there was spell of unseasonal rains, particularly during mid-

March 2016. Our visits indicated high impact from the unseasonal rains in

some states such as Bihar, Eastern UP and some parts of MP, while farmers in

South India and Western India, reported minimal impact due to unseasonal rains.

However, the impact from unseasonal rains in 2016 is likely to be less than

2015.

Net-net, both of the above reasons lead us to believe that the crop output in

Rabi 2016 is likely to decline from normal production levels. Therefore, we

believe there is a downward risk to the current 2nd

advanced estimate

released by Government for Rabi 2016 production. (Annexure 2)

Box 1: Yield decline in Rabi crops due to deficient rains

During our visit to Benipur village (at the border of Varanasi and Mirzapur

district in Eastern UP), we could clearly see the impact of deficient rainfall.

Water level went down significantly, leading to difficulty in obtaining water for

consumption purposes as well as for irrigation.

Exhibit 20. Apart from the productivity quality of produce has been impacted adversely by scarcity of water

A deficient wheat crop in a village in Varanasi district

Water levels have gone down – driving scarcity of water for

irrigation and drinking


Tube-well is the key source of irrigation in these areas and ground water level

has gone below some of tube-wells’ level and in addition paucity of electricity

(average 6 hours/daily with erratic time-lines) accentuated irrigation problem.

These regions also saw unseasonal rains during Mar 2016, which has resulted

in average yield declining to 8-9 qtl/acre from 12qtl/acre in a normal year.

Along with decline in yield, the quality of produce is also inferior (shown in

image above).

It is to be highlighted that Eastern UP still has sufficient irrigation cover while

in regions such as Marathwada (Maharashtra) with severe drought conditions

and weak irrigation cover, crop yields (such as Cotton, Sugarcane, Onions)

have likely declined sharply.

Our survey also indicated that adverse impact

from unseasonal rains (Feb-Mar 2016) on the

Rabi 2016 crop output is likely to be less than

that in 2015



Good monsoon would boost farm income

Even though the past 4 crops (including Rabi 2016) have been weak, a good

monsoon would increase farm income on the back of improved productivity

and probable higher net sown area. Even though MSP growth in the past 3

years have been weak, due to inflationary reasons MSP hike for upcoming

Kharif season would be supportive rather than sharp. Many international

MET Departments are also predicting onset of La Nina by September and

global agri commodity prices usually increases during La Nina periods. Rise

in global agri prices would also help farm income.

Good rains would aid productivity: There is significant correlation of crop yield

with monsoon rainfall, as still c.50%+ of Indian agriculture does not have

irrigation coverage and thereby depends only on rainfall. Even in regions where

there is irrigation, monsoon impacts indirectly as lack in rainfall reduces water-

table level and tube-wells which are dug at higher levels, become ineffective, as

we have seen in our trips at multiple locations.

Exhibit 21. Crops yields vary significantly with monsoon

Yield of Rice (10qtl/acre) has varied in line with monsoon Yield of wheat (13qtl/acre) also depends on monsoon

Source: CMIE, JM Financial

Exhibit 22. Correlation of yield with monsoon deficit/excess varies across

crops - Pulses and Oilseeds at c.55% while Wheat at c.81% correlation

Source: CMIE, JM Financial, Correlation from 2001-2014

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2001-02 2003-04 2005-06 2007-08 2009-10 2011-12 2013-14

Monsoon - Deficit/Excess (%) Rice Yield - YoY (%)

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

2001-02 2003-04 2005-06 2007-08 2009-10 2011-12 2013-14

Monsoon - Deficit/Excess (%) Wheat Yield - YoY (%)

60.1%

81.1% 81.1%

50.0%

59.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Rice Wheat Coarse-Cereals Pulses Oil-seeds

Co-relation of yield with monsoon (%)Yields for most of the crops are strongly

correlated with monsoon; hence good monsoon

would aid in yield growth after two years of

consecutive decline



MSP price hike would be supportive rather than steep: Most international met

departments are predicting an end to El Nino and return to neutral levels by end

of May. The Oceanic Nino Index tracking the progress of climate has declined in

January post continuous rise to maximum value. The decline indicates the

possibility of El Nino ending soon. Various international met departments have

indicated the possibility of formation of a La Nina by September.

Exhibit 23. Post hitting the maximum, Oceanic Nino Index has started to

decline indicating end of El Nino

Source: Oceanic Nino Index, Climate prediction center

During La Nina periods, agriculture commodities tend to increase in prices due to

reduction in production (owing to heavy rains) worldwide. As shown in Exhibit 24,

during the periods of La Nina (Oceanic Nino Index reaching less than negative 1:

FY08, FY11) agri commodity prices have risen sharply. Hence, the weather turning

to La Nina might help agri commodity prices to rise.

Exhibit 24. Agri commodity prices have always increased during the periods of La Nina

Movement in agri commodity (Coffee, Palm Oil, Rice) prices Movement in agri commodity (Cotton, Wheat, Corn) prices

Source: Bloomberg, Climate Prediction Center, JM Financial

(2.0)

(1.0)

0.0

1.0

2.0

3.0

Feb-02 Nov-03 Aug-05 May-07 Feb-09 Nov-10 Aug-12 May-14 Feb-16

(%)

0

0.2

0.4

0.6

0.8

1

0

100

200

300

400

500

600

700


La Nina El Nino Coffee Palm Oil Rice(%)

0

0.2

0.4

0.6

0.8

1

0

50

100

150

200

250

300

350

400

450


La Nina El Nino Cotton Wheat Corn(%)

Historically, during La Nina periods commodity

prices increase due to reduction in production

(owing to heavy rains); any increase in agri

commodity prices going forward would aid

farm income



While government’s stated intent is to double farmer’s income, a steep price rise

would be inflationary and hence we expect the price hike to be rather supportive.

The current MSP price being higher than global prices also acts as a hindrance for

high price hike.

Exhibit 25. Low MSP hikes in the past 3 years

Source: CMIE

Boost in profitability after a period of sluggishness: Farm income profitability

has struggled in the last 3 years due to low MSP hikes, low productivity and high

costs (high labor cost growth). With the parameters expected to reverse in

upcoming monsoon season, profitability is set to increase sharply based on our

estimates. We expect profitability to bounce back as profit per acre would

increase by 10-12%.

Exhibit 26. We expect good monsoon in 2016 to boost farm income in FY16-17

Rice and wheat crop to see improved profitability driven by

higher yield

Vegetables have high yield but realizations remain volatile

Source: CMIE, JM Estimates.

8%

16%

5%4% 4%

15%

5%

4% 4%

5%

0%

4%

8%

12%

16%

20%

2012 2013 2014 2015 2016

Paddy Wheat(%)

1.00

1.20

1.40

1.60

1.80

2.00

2.20

2.40

2.60

2.80

3.00

2005 2007 2009 2011 2013 2015 2017

Rice Wheat


1

2

3

4

5

6

7

8

9

2005 2007 2009 2011 2013 2015 2017

Arhar Potato Onions


MSP growth has slowed down during last 3

years; due to inflationary reasons we expect

the price hike to be supportive rather than

sharp



Importance of spatial distribution of monsoon

Due to deficient rains for last two year and drought situations in many parts of

the country, there has been focus on crops and their water requirements.

Government is encouraging farmers to take up less water intensive crops in

drought prone zone (such as movement away from sugarcane), however the shift

in crop pattern would be a medium to long term process.

Exhibit 27. Crops and water requirement

Crop Crop water need

(mm/total growing period)

Total growing period

(days)

High Water requirement

Sugarcane 1,500-2.500 270-365

Banana 1,200-2,200 300-365

Citrus 900-1200 240-365

Cotton 700-1300 180-195

Sunflower 600-1000 125-130

Moderate Water requirement

Pepper 600-900 120-210

Potato 500-700 105-145

Peanut 500-700 90-100

Maize 500-800 75-140

Rice (paddy) 450-700 90-150

Tomato 400-800 135-180

Barley/Oats/Wheat 450-650 120-150

Soybean 450-700 135-150

Low Water Requirement

Cabbage 350-500 120-140

Onion 350-550 105-140

Pea 350-500 90-100

Bean 300-500 120-150

Source: FAO

Exhibit 28. States dependence on rainfall, based on water intensity of their

key crops


In the heat map above, we have analyzed major agrarian states and water

requirement of their key crops along with irrigation coverage and cultivation

income as % of agri-household income. AP (including Telangana), Gujarat,

Karnataka and Maharashtra come as states with high vulnerability to rainfall as

compared to other states.

Cutivation Income Irrigation Cover Water Intensity of crop Farm Vulnerability

AP

Bihar

Gujarat

Haryana

Karnataka

Maharashtra

MP

Punjab

Rajasthan

TN

UP

Good Moderate Bad

Significant variation in water intake of crops;

state with low irrigation cover, high cultivation

income and higher share of water guzzling

crops have much more dependency on good

rainfall

fall



Box 2: Diversification in Farming – Rose plantation is a highly profitable

business, capital constraints limit it to large farmers

We also noticed various levels of incentives and encouragement provided by

State Governments to drive higher income levels for farmers. In Madhya

Pradesh, we came across a farm which has started growing Rose flower over

the last 2 years. The farm owner has 20 acre+ land, of which 1 acre is under

rose farming.

In terms of cost incurred for the rose plantation – after sowing the first crop

yield starts after 6 months. The average cost of operations per month is

c.Rs10,000/acre. Rose farming needs highly skilled labor – from pesticide

disbursement to irrigation and to cut flowers. Over a six month period, the

first crop can be about c.0.1mn flowers which sell at an average price of Rs2-

3/flower in normal seasons. The price shoots up near valentine period

(February) when flowers sell up to Rs10/flower. Post the first crop, flowers are

again produced over the next 2-3 month cycle over next six years.

Exhibit 29. Example of Rose Farming in MP

Rose Farming is encouraged by the state Government Requirement of skilled labour force for Rose farming


State Government promotes farmers to take up floriculture, aids in soil

testing, provides seeds and pesticides which are suitable for flower

plantation. However, given the large investment and long duration of

produce, only large farmers are able to take up the highly profitable (but

risky) businesses in agriculture.

Large farmers are able to diversify into highly

profitable and newer areas such as Rose

farming. State Governments initiatives and

support goes a long way in the adoption of new

farming practices



Non-farm income remains supportive

Over the years, share of non-farm income has steadily increased to support

consumption growth in rural India. Major sources of non-farm income are a)

dairy farming b) wage based occupation c) sand mining d) tractor income

and e) opening up a new business. The recent pick up in MGNREGA

spending (2HFY16 spending up 11% from 1HFY16), irrigation (state govt)

and rural development (road construction) have supported non-farm income

by holding up wages (even increase in southern states), tractor demand and

sub-contracting works given to small section of farmers. With sand mining

getting restarted, non-farm income has been supportive to total rural

income. Going ahead, with states continuing to spend on agriculture,

irrigation and rural development we believe non-farm income will continue

to aid rural income.

Dairy income shows weakness on the back of price pressure: While milk

prices have held up in some states, others have witnessed a drag in the last 1 to

2 years. Due to weak production, cattle feeds for cows have also witnessed sharp

rise in certain states. As a result of increased feed cost and price pressure, dairy

income has shown marginal weakness in the past 2 years. The pressure on dairy

income has been compensated by other sources of non-farm income.

Sand mining holds up tractor demand and non-farm income: As sand mining

picks up pace in most parts of the country, it acts a profitable revenue stream for

the farmer. Also, it compensates for the fall in tractor demand from agriculture

sector. With brick kiln activity also holding up, demand for tractors have

benefitted farmer’s income.

Exhibit 30. Sand mining and brick kiln activity picking up

Sand mining in Telangana Brick kiln activity in Punjab


Contracting works in certain states provide sharp income boost: As

government spending steps up in certain states by means of developing irrigation

and rural spending, farmers are getting the benefits of sub-contracting,

employment generation and high wages in Telengana and South-Karnataka. In

both the states, farmers are taking up construction of canal or lake works to

boost their incomes.

Our survey indicated weakness in dairy income

in some states, however infrastructure related

activities have shown pick-up



Exhibit 31. Infrastructure spending visible in pockets across country

Lake creation in Mysore Lake extension in Warangal


In Karnataka (villages of Gaddige and Hanumanthapura, close to Mysore) and

Telangana (Warangal) farmers have been given contract work for digging lakes

and extending the existing lakes around the villages. With a good monsoon the

water level in these lakes would help farming and improve ground water level in

nearby regions as well.

Box 3: Mission Kakatia in Telangana

Telangana Government had launched Mission Kakatia during 2015 with the

aim to revive tank based irrigation through silt removal. The Government has

taken up a total of 46,531 tanks to revive in 10 districts (20% each for the

next 5 years).

State Government has also expedited the process of tendering and decision

making at lower levels and the completion of this project will also help

increasing the ground water level of nearby regions.

There has been high demand of labor due to the project work of Mission

Kakatia leading to high wages in Telangana as compared to other states. Our

interaction with farmers indicated that regions where there has been tank

revival, water availability has improved and farmers have reported higher

yields. However, the heat wave condition at present in the state might delay

the completion plans for the current year.

Based on our discussions, contracting works for digging the lake and

even sub-contracting works for laying out canal (low requirement of

technology) are given out to farmers and hence adds to the rural income.

In our visit we came across a farmer who has taken up sub-contracting work

for construction of a small stretch of canal yielding him Rs0.2mn (50% of his

usual income). The canal work has been divided up and given to many

farmers in the region which will boost the non-farm income for the region.

Hence this project apart from helping to increase the yield of farming and

ground water availability, also acts a huge boost to non-farm income in the

hands of farmers.

Mission Kakatia aims to revive tank based

irrigation in Telangana; non-farm income has

seen significant boost in regions where project

work has been taken up



Exhibit 32. Infrastructure spending aids in generating non-farm income

Varanasi – Clean up and expansion of Varuna river Six lane highway construction in Eastern UP


We saw significant infrastructure development projects near Varanasi - Road

projects, Ganga clean-up and Varuna river project work are clearly visible. Work

on infrastructure seems to have picked up in the last six months (since we last

visited).

Box 4: Non-farm income is critical for a small farmer’s consumption

During our trips, we met small and marginal farmers to understand their

earnings and consumption pattern. Our discussions with a small farmer (2

acre owner) in North India indicated that farm income is clearly in-sufficient to

meet the house-hold needs.

We met another farmer in Raisen district of MP who has 2 acre field. The

farmer grows 1 crop of paddy and 1 crop of wheat over a year. He earns

Rs30-35,000 per acre on a good crop, leading to farm income of c.Rs60-

70,000 per year, he has three children and his monthly expense is Rs10,000

with half of it spent on food and the rest on clothes, other consumables,

study materials, medical etc.

To finance the deficit (5,000 per month), he and his wife take up odd jobs as

labor in nearby areas. The farmer sends his children to Government schools

as he is unable to pay the private school’s charge of Rs6-7,000 as admission

fees and Rs150/month fees.

In terms of food consumption – they grow vegetables in their house and

typical in-take of vegetables is 2-3 days a week. Due to sharp increase in the

price of pulses, they take pulses not more than 3-4 times a month. The grains

provided by PDS is used for house-hold consumption and any delay in

obtaining PDS food, impacts them adversely.

Farm income is in-sufficient to support a small

agriculture family



NREGA expenditure picks up pace in 2HFY16 as development expenditure

remains mixed

The NREGA spending for FY15 witnessed a fall of 5% from FY14 and 1HFY16

followed a similar path as it declined 10% YoY. However, 2HFY16 has seen

momentum in NREGA expenditure as overall FY16 spending increased by 17.6%

YoY on a low base of FY15. The increased expenditure spending will help in

improving the non-farm income.

Consequently, the number of person days of employment has also

witnessed a rebound in 2HFY16 as it increased 30% from 1HFY16 levels.

Number of person days has increased by 40% from the low base of FY15. This

would increase the net number of days a person gets paid and subsequently will

increase the income for the farmer. Hence, contribution from NREGA to non-

farm income of farmers (marginal) saw a pickup in 2HFY16.

Exhibit 33. Pick up in NREGA expenditure combined with increased person-days’ work supports income levels

NREGA monthly wage expenditure trend Person-days’ work under NREGA – Sharp pick up

Source: nrega.nic.in, JM Financial

While spending on NREGA has seen a pick, central government spending on

agriculture has witnessed a sharp fall (-16%YoY) even as road projects spending

witnessed a boost (18% YoY). Rural development spending remained benign at

5% YoY. Hence, development induced employment opportunities in rural is

mixed with roads having a boost and other sectors being benign.

Exhibit 34. Government concentrating more on development related projects

(FYTD)

Source: CMIE, JM Financial

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

April May June July Aug Sept Oct Nov Dec Jan Feb March

FY16 FY15 FY14(Rs MM)

0

50

100

150

200

250

300

350

April May June July Aug Sept Oct Nov Dec Jan Feb

FY16 FY15 FY14(MM)

0

100

200

300

400

500

600

700

800

Road Transport Rural development Agriculture

FY12 FY13 FY14 FY15 FY16(Rs bn)

After YoY decline of 5% in FY15 and 10% in

1HFY16, strong growth rebound in 2HFY16 leads

to 18% YoY growth in NREGA expenditure in FY16

Development projects have witnessed a slight

higher spending but overall employment

generation remains weak



Government plans to increase spending on irrigation, agriculture and

developmental expenditure

Going ahead we expect government spending to aid in holding up tractor

demands, labor wages, employment generation and business opportunities.

Hence, we expect non-farm income to remain supportive and add to total income.

Central government steps up spending on agriculture and allied activities:

With government’s agenda of doubling farmers’ income in 5 years, government

has allocated higher amounts from budget towards agriculture and rural

development compared to other developmental expenditure such as roads (IEBR

in roads increased 112% while budget share growth is 6%).

Exhibit 35. Central government allocation towards rural based ministries shows an increase

Central plan outlay of ministries

Even as central plan allocation to roads is less, centrally

sponsored state roads have witnessed share increase

Source: Union Budget, JM Financial

States increase spending on agriculture and rural development: With

consecutive monsoon failures and crop failures inducing stress in rural economy,

most states have increased the allocation for rural development, irrigation,

agriculture and allied activities to smoothen the pressure. While, states with low

irrigation facilities (Karnataka, MP) have increased spending on irrigation to

20%YoY, other states chose to spend in rural development and agriculture sector.

However, certain states like Bihar have not opted to increase spending in either of

agriculture, rural development or irrigation.

Exhibit 36. Most states have budgeted for increase in spending in either of Agri, Rural development or Irrigation

Spending in Agri and Rural a key focus area for most of the

states

While Telangana plans very high growth in irrigation spend,

few other states have budgeted 20%+ growth in irrigation

spend for FY17

Source: State Budget, JM Financial

0

50

100

150

200

250

300

350

400

450

500

Road Transport Rural development Agriculture

FY15 FY16 FY17(Rs bn)

0

100

200

300

400

500

600

700

800

FY15 (A) FY16 (RE) FY17 (BE)

NHAI+MoRTH Rural roads North East Allocated to State Plan(Rs Bn)

27%

2%

(3%)

41%

(8%)

7%

24% 21%

11%

20%

25%

-20%

0%

20%

40%

60%

Gujarat Karnataka Telangana Rajasthan Punjab Tamil Nadu

Agriculture Rural Development(% FY 17 growth)

3%

20%

194%

34% 21%

35%

20%

-10%

20%

50%

80%

110%

140%

170%

200%

Gujarat Karnataka Telangana Rajasthan Punjab West Bengal MP

Irrigation and Flood Control(% FY 17 growth)

States have increased spending on rural

development and agriculture



Faster implementation of 7th

Pay commission would aid rural consumption

Central government budget accounts for 60% of Pay hikes: We estimate

central government budget to include Rs 450-500bn to compensate for pay hike

recommendation. We estimate the allocated amount to take into effect only 60%

of the pay hike recommendations and hence will be available only for a little

more than half a year. However, the pay hike will help in boosting consumption

demand. With 53% of the employees residing in z-class (Tier-III cities), rural areas

will also be beneficial from the pay hike.

Exhibit 37. Central pay hikes would boost consumption even in Rural India

7th CPC would see pay hiked by close to 25-35% Share of employees in different cities

Source: Central govt census, 2014, X-Class: Tier-1 (8 cities), Y-Class: Tier-II, Z-Class: Tier-III cities, JM Financial

Pay hikes by state government to come into effect from FY18: Post central

government pay hikes, state government usually follow the central govt

recommendations to provide hikes for their employees as well. However, in FY17

state budgets, the effect of pay hikes is not witnessed in any of the state

finances. The growth of employee expenses in all state finances remains

moderate to rule out the inclusion of pay hikes. While most states have not

commented on the timeline for implementing 7th

pay commission, we expect

states will gradually start implementing from FY18. Given that the number of

state government employees is higher with greater rural presence,

implementation of pay commission recommendations by state government will

give a huge boost to rural economy.

Exhibit 38. Weak growth in staff cost (FY17 BE) indicates deferral of pay

hikes

Source: State budgets, JM Financial

0

50,000

100,000

150,000

200,000

250,000

HAG PB-4 PB-3 PB-2 PB-2 PB-1

Old Salary Est. Increase(Rs)

18.1

29.2

52.8

0

10

20

30

40

50

60

X-Class Y-Class Z-Class

(%)

10.7

8.3

10.5

12.1

8.6

0

2

4

6

8

10

12

14

Bihar Karnataka Punjab Tamil Nadu West Bengal

(%)

Wage hikes from 7th

pay commission expected to

come in States from FY18 onwards



Box 5: ‘Lassi’nomics – Case of a ‘lassi’ (yoghurt based drink) shop owner

Enroute our rural trip near Varanasi, Uttar Pradesh, we came across a small

shop ‘Shivprasad Lassi Bhandar’ selling ‘lassi’ (yoghurt based drink). The

shop is located at Ramnagar.

Some trivia about the locality: Ramnagar is a city and a municipal board in

Varanasi, Uttar Pradesh. Ramnagar has a fort known as Ramnagar Fort which

is still considered the residence of King of Varanasi (Benares).

Varanasi being a pilgrimage site, people from across the country throng the

place throughout the year. Most locals/cab drivers take the visitors to this

‘lassi’ shop that is considered to be of the best quality in the neighborhood.

Several travel sites also contain information on this ‘lassi’ shop.

What surprised us was the highly profitable operation he ran despite

being a small scale player. On an average, he makes a net profit of

c.Rs1.52mn and a net profit margin of 51% on the back of a) improving

popularity and brand establishment b) steadfast quality control c) increasing

flow of visitors and d) stable realizations.

Exhibit 39. ‘Lassi’ Shop and its products in Ramnagar, Varanasi, UP

‘Shivprasad Lassi Bhandar’ Lassi being prepared and served


Exhibit 40. ‘Lassi’nomics

Detailed break-up Amount (Rs)

No of 'lassi' sold per day 200

Price per cup 50

Total revenue per day 10,000

Revenue per year 3,000,000

Cost per year 1,472,000

Raw material (RM) cost per cup 20

RM cost per day 4,000

RM cost per year 1,200,000

Rent per year 120,000

Employee cost per year 72,000

Electricity cost per year 30,000

Other misc. expenses 50,000

Net Profit per year 1,528,000

Net profit margin (%) 51%


Highly profitable business of selling a single

product ‘lassi’ (Yogurt based drink)

Review of the lassi shop on a reputed travel site:

https://www.tripadvisor.in/Restaurant_Review-

g297685-d3383930-Reviews-

Shiv_Prasaad_Lassi_Bhandar-

Varanasi_Uttar_Pradesh.html

Review

https://www.tripadvisor.in/Restaurant_Review-g297685-d3383930-Reviews-Shiv_Prasaad_Lassi_Bhandar-Varanasi_Uttar_Pradesh.html






Financial inclusion, DBT focus to be a long term

driver for rural India

The efforts towards financial inclusion, JAM (Jan Dhan Yojana, Aadhar, Mobility)

are likely to improve the targeting of Government schemes and eventually better

cash flow to the end farmer/citizen. However, this is a long process and the

outcomes would be based on efficiency in execution. So far government has

managed to enroll 216mn accounts under PMJDY schemes. With higher

linkage of subsidy to PMJDY accounts and increased usage of bank

accounts, the share of zero balance accounts has declined to 26.5% from

56% same period last year. During our trip, we could sense the changes in rural

India, with Aadhaar card becoming ubiquitous, first time users of bank accounts

and increasing comfort with mobile usage.

Exhibit 41. PMJDY account enrolments continue in full-swing and have now crossed 216mn+

Enrolments under PMJDY have touched 216mn+ as on Apr’16

Share of Zero balance accounts has been falling over the

months

Source: PMJDY, JM Financial

Box 6: Financial inclusion efforts – Meeting with Central Bank of India

official, Raisen, MP

As per the official, there has certainly been an improvement in devolution of

funds to the rural and agricultural segment. Banks are more focused than

earlier to increase financial inclusion.

The key traditional loan offerings to farmers are – (a) Kisan credit card which

is an overdraft facility given to farmer at subsidized rate and the amount is

based on his land holding. The rate of approval varies across regions – some

districts in MP have Rs23,000/acre as the approved rate, so a 5 acre farmer

gets Rs115,000 overdraft facility and additional amount, adjudged by the

manager. (b) Term loans which are given based on additional collateral and

properties.

The new scheme which is getting attention in their area is the MUDRA (Micro

Units Development and Refinance Agency) loans. There are three schemes

named – (a) Shishu loans of up to Rs50,000 where Aadhar based

identification is required and no collateral is required, (b) Kishor loans of up

to Rs 5 lakhs and, (c) Tarun of up to Rs 10 lakhs.

Banks have set up aggressive targets of extending at least 25 MUDRA loans

per month. This has benefited small-shop owners, fruit-vegetable

vendors, small businesses and small farmers to avail of the credit

facility.

37

69

93

125

153171

190205

216

0

50

100

150

200

250

Total A/C Rupay Debit Card(mn)

87.6

26.5

15

25

35

45

55

65

75

85

Sep-14 Oct-14 Dec-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16

(%)

Share of zero balance accounts in PMJDY scheme

down from 56% same time last year to 27% at

present

MUDRA loans (less than 50,000) with easier

processing requirement enables small farmers

and business owners to avail of institutional

credit



Box 7: Strengthening and empowerment of local village administration –

Key to effective delivery of services to farmers

Meeting with Sarpanch

We visited a Gram panchayat in Pachamah village (1,700 inhabitants, 84

Below Poverty level families, 200 MGNREGA card-holders) in Sehore district

(Madhya Pradesh). This gram panchayat has been awarded by the Chief

Minister and district administration for enabling innovative farming practices,

improvement in irrigation and prompt delivery of Government services. The

high education levels and dedication of its key officials has aided

performance - Sarpanch is a 28 year old MBA graduate (also a farmer) and

another key official in the panchayat is an MCA graduate. This enables

Pachamah Gram panchayat to be ahead in terms of adoption of modern

technology and get knowledge about farming related issues in time.

Exhibit 42. A village Panchayat in Sehore district, MP

Sarpanch (centre) is an MBA grad Board-room in the panchayat Video-conferencing and digital awareness


Low salary levels of Gram Panchayat members

What is to be noted is that despite gram panchayat’s importance, salary levels

of its official are quite low. A Sarpanch (head of Gram Panchayat) gets salary

of Rs1,700/month, which is much below the labor rate given in MGNREGA

(Rs178/days+ or Rs5,340 for 30 days). Sarpanch on an average has to spend

3-4hours/day during the month, including few full days when they have to

travel to meet district administration or if some official is visiting the village.

Allocation of Gram Panchayat budget to be transparent

We also came to know that allocation of budget to the Panchayat’s are now

based on population and it reduces the discretion of district officials. At

present in MP, the minimum allocation of Panchayat yearly is - (a) Rs 5 lakhs

for <2K populated villages, (b) Rs8lakhs/year for 2k-5k population, (c) Rs10

lakhs for 5k+ population. 20% of the allocation is kept for administrative

purposes and thereby the allocated budget seemed very limited for the

development purposes.

Gram Panchayat remains key medium for

delivering Government services to the villagers.

A well-functioning gram panchayat goes a long

way in improving economic conditions of a

village, as illustrated by Pachamah village.

Extremely low salary levels for key officials of

gram panchayat and modest budgets remain a

key impediment to development of small villages



Direct benefit transfer (DBT) to plug leakages in the system

The use of direct cash transfer in LPG (Liquefied Petroleum Gas) has already led

to better targeting of Government subsidies. A number of Government schemes

are also shifting towards direct cash/account transfer, which will improve the

targeting and disbursal, in our view. Subsidy as % of GDP has come down from

2.6% in FY13 to 1.9% in FY16RE and is expected to be 1.7% in FY17BE.

A discussion with Central bank of India official substantiated the magnitude of

savings which can be achieved through direct cash transfer. Two years back, in

an audit of the grant and process followed in a scholarship scheme, only 130

beneficiaries out of 1,200 recipients could be traced. Post the change in

disbursement methodology (scholarship now provided directly in student’s bank

account), an audit six months back could trace up to 95% of the recipients.

Box 8: DBT in Public Distribution System would benefit in long run, but

needs careful implementation on account of being critical for small and

marginal rural population

The leakages in distribution of food-grains and Sugar/salt through the public

distribution system (PDS) can be improved with use of technology and

Aadhaar based targeting. Our interaction with small and marginal farmers

indicated that distribution of essential commodities has improved over last

few years in some of the regions, though the quality of commodities obtained

from PDS may be inferior as compared to that from the open market. Despite

the perceived lower quality, PDS has been essential support for their basic

consumption and any material change in distribution should be implemented

gradually

Exhibit 43. DBT in the PDS would go a long way in removing leakages in the current system

A sample receipt of PDS – Rice, Wheat, Salt - Rs1/kg, Sugar -

Rs13.5/kg and Kerosene - Rs16.9/litre

Interaction with small and marginal farmers in Raisen district,

MP


There have been 26 districts in country where DBT in Kerosene has been

launched from Apr 1, 2016 including Hoshangabad in MP and initial feedback

has been quite positive from the users there. However, we will have to wait

for the complete implementation of DBT to assess its full impact.

Improvement in beneficiary targeting under

Direct Cash (account) transfer schemes



Box 9: Financial inclusion efforts – Service centres to improve digital

inclusion

We also visited few Common Service Centres operated on franchise model by

Vakarangee in Maharashtra, UP and Madhya Pradesh. Common Service

centres were envisaged as part of improving delivery of Government services

across rural India. The centres we visited catered largely to the rural/lower

income population in urban centres.

Exhibit 44. Common Service Centres provide multiple services (banking, eGovernance, insurance, eCommerce) to the

rural population/ urban under privileged class

Service centre in a low income neighbourhood in Bhopal,

Madhya Pradesh

Service centre in Palghar district of Maharashtra


The key services provided through these service centres are – (a) Branch

banking services (deposits, withdrawal, other banking transactions), (b)

eGovernance (issue/update of UID cards) & other Government services, (c)

insurance and (d) online/ecommerce transaction at selected locations (in tie-

up with Amazon).

We could clearly see the positive impact these service centres are having on

the rural population. Typical users of these centres are generally

uncomfortable walking to regular bank branches, are unable to fill forms by

themselves etc. Here in these CSCs, they are assisted by the centre personnel

and given that most of the transactions are Aadhar linked, so at instances

they don’t need to fill forms.

Effective use of Aadhar (UID) definitely has the potential to bring massive

amount of rural population to formal banking channels, the green-shoots we

can see across pockets in the country.



Wealth effect of land

Land prices in India had jumped c.5-10x over the past ten years driven by

urbanization, improved road connectivity and remittances. The increasing price

trend also encouraged speculation which aided the price increase.

We had seen signs of downward pressure on land prices during our second trip

(Oct 2015) with number of transactions reducing. Our current trip (Apr 2016)

corroborated our view of continued weakness in land prices. We saw instances of

land price increases near urban areas or where new infrastructure facilities are

coming up. Barring those instances, land prices are largely stable or facing

downward pressure, with additional state specific factors at play.

Exhibit 45. Land prices have softened and transactions reduced

State Real estate

trend Comments

Madhya Pradesh Weakness in agriculture during last two years

Uttar Pradesh Number of transactions have declined significantly

Bihar Number of transactions have declined significantly

Punjab Change in land use policy (conversion from

agriculture to other usage) impacted prices

Telangana Prices increased near capital, but down outside

region

Karnataka Prices weaker in northern Karnataka

Maharashtra Weak agriculture, drought impact

Tamil Nadu Lower transactions due to state elections, prices

expected to improve post elections


We believe the prices are likely to remain stable even in an improving macro-

economic scenario. Efforts to increase transparency in land purchase/sales

through online registrations, increase in ready reckoner rates and other similar

efforts are also impacting land transactions.

We have seen improved propensity to consume in rural India (elasticity of rural

consumption to rural GDP increased from <0.7x pre-2009 to close to 1x in years

after 2009), which was also driven by the land price increase over the years. As

land prices stop their upward growth trajectory, we expect wealth effect to taper

and also impact consumption adversely.

Land prices stable to down in majority of areas

where we visited



Increasing indebtedness in Rural India

Rural credit growing faster than other segments: While urban credit

outstanding has slowed down in the last 5 years (12% CAGR in CY11-15 vs 24% in

CY06-10), rural credit has maintained the momentum (18% CAGR in CY11-CY15 vs

18% in CY06-10) as it continued growing at a fast pace. Eventually rural share of

overall credit has increased from 16.8% in Dec’10 to 20.3% in Dec’15. The high

growth of rural credit signifies the increasing leverage taken by rural India along

with the event of declining income levels in agri households.

As of Dec’15 total credit outstanding stood at Rs 70trn (10.9%YoY) with rural

credit standing at Rs 14trn (12.8%YoY) and urban at Rs 54trn (8.6%YoY). In FY15,

at disaggregated level, some of the fast growing segments in rural credit were

agriculture (13.2%YoY), industry (13.7%YoY), construction (28.9%YoY), trade

(8.9%YoY) and personal loans (10.4%YoY).

Exhibit 46. Flow of credit to rural economy

Growth in loans outstanding in rural and semi-urban areas

have outpaced both urban and metropolitan and overall

growth

Credit disbursements to rural India growing at faster than

urban credit on 5Yr CAGR basis

Source: CMIE, JM Financial, Rural Safari

Exhibit 47. Incidence of Indebtedness for rural households

Incidence of indebtedness is relatively higher among medium

and large landholders (over 2 hectares)

Across income decile (asset holdings), major portion of rural

loans are utilized to meet household expenditures

Source: NSSO Survey, JM Financial, Rural Safari, Lowest decile class comprises of households in the bottom 10% of asset holding based ranking

12.8%

10.4%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Jun-

04

Dec

-04

Jun-

05

Dec

-05

Jun-

06

Dec

-06

Jun-

07

Dec

-07

Jun-

08

Dec

-08

Jun-

09

Dec

-09

Jun-

10

Dec

-10

Jun-

11

Dec

-11

Jun-

12

Dec

-12

Jun-

13

Dec

-13

Jun-

14

Dec

-14

Jun-

15

Dec

-15

Total Semi Urban & Rural Urban & Metropolitan

17.9%

23.7%

17.5%

12.2%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Rural- Semi-urban SCB Credit Urban - Metropolitan SCB Credit

CY06-CY10 CY11-CY15

42%

47% 48%

56%

67%

76%79%

52%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

20,000

70,000

120,000

170,000

220,000

270,000

320,000

<0.01 0.01-0.40 0.41-1.00 1.01-2.00 2.01-4.00 4.01-10.00 >10 All-India

Avg. O/S loan % Indebted agri-households (RHS)

ha unit

0

20

40

60

80

100

1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th

Farm expenditure Non-farm expenditure Household expenditure(%)



Usage of credit and increasing indebtedness: Typically, years of bad monsoon

and/or bad cropping season have also been the years of high credit growth

explaining the constant growth in rural outstanding credit in the last 5 years. The

indebtedness increases as income decile (asset holding) rises. Average

outstanding loan of agri household stands at Rs 47,000 (NSSO survey, 2013) with

loan of higher income decile increasing to Rs 290,000. The credit availed is

primarily used for household expenditure across all income deciles. While farm

expenditure is less in lower income decile, spending of credit on farm equipment

increases for households with high land holding.

Sources of credit: According to NSSO, 19% of rural households depended on non-

institutional sources of credit as against 17.2% for institutional credit in FY12.

The dependence on former, however, increases for households with higher asset

holdings. However, with emphasis on financial inclusion, expanding bank

penetration and successful offtake under PMJDY the role of non-institutional

credit may be expected to gradually come down.

Exhibit 48. With 20% share in total loans, personal loans are growing at a robust 13% CAGR from FY10-15

Loans for consumer durables is the fastest growing segment Housing loans have the largest share in personal loans in FY15


Lower income has increased leverage ratios among rural households: With

lower yields, lower net sown area and increasing incidence of crop failure, farm

income of an average farmer has declined in the last 2 years. Based on our survey

and NSSO data, we have estimated farm income for the past 4 years and expected

income for FY17 assuming a good monsoon (Exhibit 50 and Exhibit 52). We

estimate farm income for an average farmer (land holding : 2.7 acres) to have

fallen 7% in FY15 and 7% in FY16 even as non-farm income compensates by

pushing the overall income growth to 2% in FY15 and neutral in FY16. Since MSP

prices were low and wage growth was high, farm income was also affected in

FY14 (de-growth of 1%YoY). With the assumption of a good monsoon providing

better yields, we predict farm income to grow at 20% as total income grows at

12%YoY.

As seen in Exhibit 50, we estimate the surplus for an average household (revenue-

expenditure) to have dropped post FY13. With increasing deficit for an average

farmer, requirement of debt would have increased and we estimate debt/asset

ratio to have increased from 7.5% in FY14 to 9.8% in FY16. Pressure on land

prices have also contributed adversely to increasing the ratio. The falling income

levels have also resulted in the need for borrowing more due to consumption and

income mismatch. With an average interest rate at 12%, we estimate

interest/income ratio to have risen from 8.0% in FY13 to 9.0% in FY16. Both

leverage ratios indicate the leverage increase in farmer balance sheet.

18.4%

13.7%

15.5%14.8%

10.5%

6.0%

10.0%

14.0%

18.0%

22.0%

ConsumerDurables

Housing Vehicles Education Others

2.3%

45.1%

10.5%

10.9%

31.2%

Consumer Durables Housing Vehicles Education Others



Exhibit 49. Weak base and good monsoon are expected to support income growth and help repair rural balance sheet

Agri income is expected to rise as non-agri remains

“supportive” for total income growth



Exhibit 50. Income calculations for an average farmer

FY13 FY14 FY15 FY16 FY17E Assumptions

Average Land Holding Acres 2.7 2.7 2.7 2.7 2.7 NSSO 68th round, Avg land holding: 1.1 ha

Cost of Land Rs 270,758 297,834 282,942 254,648 254,648 Value of land from NSSO Survey & assumptions

Land Value Rs 731,047 804,152 763,944 687,550 687,550

Kharif Crop - Rice

Adjustment of net crop

sown area (x) 0.70 0.70 0.68 0.65 0.70

Initial assumption to adjust income to NSSO

survey. Varied based on yearly net sown area

Productivity (qtl/acre) 14.9 14.6 14.1 13.8 14.2 Calculated as ratio of sown area & production

Price MSP - Rs 1,280 1,345 1,400 1,450 1,523 MSP price till FY16, JMFe for FY17

Revenue from crop Rs 13,320 13,741 13,402 13,004 15,167

Byproduct Rs 1,127 1,194 1,182 1,101 1,194 Value of byproduct for planting the crop

Cost Rs 6,763 7,563 7,801 7,823 8,873 Cost assumptions based on NSSO survey & WPI

Rabi Crop - Wheat


sown area (x) 0.70 0.70 0.68 0.65 0.70





Revenue Rs 11,918 12,474 11,906 11,611 13,805



Annual agri Income Rs 44,687 44,252 41,331 38,335 46,168

% of Non-agri Income (%) 46% 50% 54% 57% 54%

Wages Rs 20,736 24,883 28,616 30,762 32,300 Rural wage growth from CMIE

Farming of animals Rs 9,816 10,994 11,654 11,887 12,481 NDDB release on value of livestock

Others Rs 7,116 7,828 8,454 8,876 9,764 JMF Estimate

Non-agri Income Rs 37,668 43,705 48,723 51,525 54,545

Total Income Rs 82,355 87,956 90,054 89,860 100,713

Consumption Rs 77,084 84,793 89,032 90,813 97,170 NSSO survey and JMF estimate

Surplus/Deficit Rs 5,271 3,164 1,022 (953) 3,543

Average Debt Rs 54,800 60,280 63,294 66,459 70,070 NSSO Survey and JMF estimate

Additional debt Rs 0 0 0 953 0

Total Debt Rs 54,800 60,280 63,294 67,411 70,070

Debt/Asset x 7.5% 7.5% 8.3% 9.8% 10.2%

Debt/Income x 66.5% 68.5% 70.3% 75.0% 69.6%

Interest x 6,576 7,234 7,595 8,089 8,408

Interest / income x 8.0% 8.2% 8.4% 9.0% 8.3%


An average farmer gets some relief from non-farm income as the share of non-

farm income (~50% of total income) is high. But for a large farmer, the cultivation

is much higher than non-farm income (only 20% of total). Hence, weak monsoon

have deeply affected the income levels of large farmers. We estimate total income

-1%

16%

7%

-7%

11%

2%

-7%

6%

0%

20%

6%

12%

-10%

-5%

0%

5%

10%

15%

20%

25%


FY14 FY15 FY16 FY17E(%)

7.5% 7.5%

8.3%

9.8%

10.2%

8.0% 8.2%

8.4%

9.0%

8.3%

6%

7%

8%

9%

10%

11%





to have decreased by 3% in FY15 and by 4% in FY16. But with a better monsoon,

the income levels of the farmer can increase by 17%.

With falling incomes, savings of a large farmer would have dropped. Based on our

calculations, we estimate debt/asset ratio to increase from 4.5% in FY14 to 5.9%

in FY16 while interest/income increases from 7.3% in FY13 to 9.5% in FY16.

Exhibit 51. Higher agri income to provide relief to depleting savings of a large farmer

Due to higher share of agri income, total income for a large farmer will

increase higher than average farmer



Exhibit 52. Income calculations for a large farmer

FY13 FY14 FY15 FY16 FY17E Assumptions

Average Land Holding Acres 15.0 15.0 15.0 15.0 15.0

Cost of Land Rs 270,758 297,834 282,942 254,648 254,648 Value of land from NSSO Survey & assumptions

Land Value Rs 4,061,372 4,467,509 4,244,134 3,819,721 3,819,721

Kharif Crop - Rice


sown area (x) 0.70 0.70 0.68 0.65 0.70





Revenue from crop Rs 13,320 13,741 13,402 13,004 15,167



Rabi Crop - Wheat


sown area (x) 0.70 0.70 0.68 0.65 0.70





Revenue Rs 11,918 12,474 11,906 11,611 13,805



Annual agri Income Rs 248,261 245,842 229,617 212,973 256,490

% of Non-agri Income (%) 18% 20% 23% 25% 23%

Wages Rs 24,372 29,246 33,633 36,156 37,964 Rural wage growth from CMIE

Farming of animals Rs 18,012 20,173 21,384 21,812 22,902 NDDB release on value of livestock

Others Rs 10,332 11,365 12,274 12,888 14,177 JMF Estimate

Non-agri Income Rs 52,716 60,785 67,292 70,856 75,043

Total Income Rs 300,977 306,627 296,909 283,829 331,533

Consumption Rs 225,733 252,820 271,782 285,371 308,201 NSSO survey and JMF estimate

Surplus/Deficit Rs 75,244 53,807 25,127 (1,542) 23,332

Average Debt Rs 184,000 202,400 212,520 223,146 242,540 NSSO Survey and JMF estimate

Additional debt Rs 0 0 0 1,542 0

Total Debt Rs 184,000 202,400 212,520 224,688 242,540

Debt/Asset x 4.5% 4.5% 5.0% 5.9% 6.3%

Debt/Income x 61.1% 66.0% 71.6% 79.2% 73.2%

Interest x 22,080 24,288 25,502 26,963 29,105

Interest / income x 7.3% 7.9% 8.6% 9.5% 8.8%


-1%

15%

2%

-7%

11%

-3%

-7%

5%

-4%

20%

6%

17%

-10%

-5%

0%

5%

10%

15%

20%

25%


FY14 FY15 FY16 FY17E(%)

4.5% 4.5%

5.0%

5.9%

6.5%

7.3%

7.9%

8.6%

9.5%

8.9%

4%

5%

6%

7%

8%

9%

10%





Deleveraging and small ticket purchases to take

front stage

With farmer income taking a hit in the past 2 years and based on our survey

it is evident that consumption of essentials, frequency of consumption (lower

end farmer) and impulsive purchases (average farmer) have come down. With

lower income, we also estimate the debt level to have increased and savings

level to have declined for the farmers. Hence, we expect the savings from the

initial crop to be utilized for deleveraging exercise and increasing purchases

of small ticket items. Consumer durables and other large ticket purchases

would take time as we believe farmer will look into building their savings as

it has been vanquished in the past 2 years. We are playing the theme of

deleveraging and small ticket purchases in our model portfolio through

Mahindra Finance and Hero Motocorp.

Falling land prices could constrain propensity to consume: During the last

decade, elasticity of consumption rose fast in Rural India as land prices were

increasing and provided support. But with land prices coming under pressure, we

expect the elasticity to fall less than 1 in the short term. With lower elasticity, an

increase in income may not completely transfer into consumption.

Exhibit 53. Elasticity could be under pressure due to fallen land prices

Source: NSSO, JM Financial

With fall in income levels and due to possible deficit post consumption, we

estimate debt levels and savings of farmer to have been impacted negatively over

the past 3 years. The leveraged balance sheet would also reduce elasticity and

people’s propensity to consume. We expect farmers to undergo deleveraging

exercise to bring down the debt to comfortable levels before opting for big ticket

purchases. Based on our calculations savings from the initial crops could go

either towards deleveraging the balance sheet or building savings that has been

depleted in the previous years.

In our examples, post consumption we estimate debt/asset of an average farmer

to drop by 0.5% while the ratio for large farmer would be 0.6%. Hence an average

farmer would need 2-3 successful crops to deleverage completely and hit back to

high consumption pattern.

6.4

10.7

17.4

11.6

13.6

17.6

0.6

0.8

1.0

0.0

0.2

0.4

0.6

0.8

1.0

1.2

0

4

8

12

16

20

FY94-05 FY05-10 FY10-12

MPCE Rural per capita GDP Multiplier (RHS) (x)(% CAGR)



Exhibit 54. Given the high leverage, we expect building up savings and deleveraging to be the first activity

De-leveraging by the average farmer De-leveraging by the larger farmer


Small ticket purchases would dominate the big ticket purchases: With decline

in income, consumption capacity of Rural India has come down in the past 2

years. It is evident from our survey that impulse purchases have dropped with

essentials also taking a hit among below average farmers. The frequency of

consumption of both impulse (average farmer) and essentials (below average)

have dropped in the last 2 years. The drop in consumption is evident in volume

growth numbers of rural oriented companies as shown in Exhibit 58. With good

monsoon and higher income, we expect small ticket items and regular

consumables to take primary stand.

Exhibit 55. Lower income in the past 3 years has affected consumption in Rural India

Reduction in frequency of consumption and delay in

purchasing is evident in weak volume growth of rural stocks

Good monsoon plays a crucial part in increasing rural

consumption


Positioning the portfolio for deleveraging and small ticket items: We prefer to

play the initial stage of a rural recovery through Mahindra Finance (improvement

in recoveries and NIM expansion to lead to strong 30% EPS CAGR over FY16-18E)

and Hero Motocorp (upside risks to earnings on the back of increase in volume

growth).

7.5%

8.3%

9.8% 9.7%

0.5%

6%

7%

8%

9%

10%

11%


Debt/Asset(%)

4.5%

5.0%

5.9% 5.7%

0.6%

4%

5%

6%

7%


Debt/Asset(%)

(40)

(20)

0

20

40

60

1QFY10 1QFY11 1QFY12 1QFY13 1QFY14 1QFY15 1QFY16

HUL 2W Tractor(%)Monsoon Rural Credit Growth Tractor Volume Growth 2W Volume Growth

CY05

CY06

CY07

CY08

CY09 Loan Waiver Scheme Loan Waiver Scheme

CY10 1st year of New Govt.

6th pay commission

1st year of New Govt.

6th pay commission

CY11

CY12

CY13

CY14

CY15

Good Moderate Bad



Box 10: Mr Nitin Shelke represents a middle class consumer in

Marathwada region

• Lives with his parents, wife and two children.

• Owns 14 acres of land and works as a teacher in a nearby school.

• Owns a car and a bike though does not have an air-conditioner at home.

• Has seen >50% decline in crop yields in his farm this year and has also been

forced to reduce spends on daily essentials (such as no. of times/day of tea

reduced from 4 to 2, less number of chocolates for kids) this year.

• In case of a better monsoon this year, he would apply his incremental

income on reducing the debt burden taken to finance crop losses.

Exhibit 56. With a medium farmer (14 acres) in Marathwada region


Farm income decline has led to reduction in

staples and small ticket consumption as well



Some observations from our trip...

Exhibit 57. Around our trips

A farmer in Mysore – Non-farm income support through

tractor rental income A familiar scene outside most of towns/cities


Box 11: Social venture also aiding rural income in select pockets

We also interacted with social entrepreneurs whose venture have aided in

improving income of villagers on a sustainable basis. One such example is a

company called Grass Routes which operates community managed rural

tourism.

The company at present has operations in 10 villages and typically choses

villages with 40-300 households. Each of the village they have chosen has

majority of population below poverty line.

In terms of impact, at Purushwadi, one village in Ahmednagar district of

Maharashtra, average house-hold income was c.Rs12-14,000 per annum

during 2006, which has now almost trebled to Rs35-40,000 per annum. The

increase in income has been on account of – (a) additional revenues from

tourism, (b) better irrigation facility leading to yield improvement from

farming as well.

Purushwadi has 109 house-holds and now more than 50 household are

engaged in tourism. Primarily women and youth are involved, with women

trained as cooks and youths as guides and house-keeper. The whole process

of preparing a village for tourism takes at least a year and afterwards, a

village committee manages the whole process.

For each batch of 4-5 tourists, there are six villagers who get involved – 2 act

as guide, 2 for food and 2 work on cleaning and other associated activities.

Apart from increase in income, Purushwadi has also seen improvement in

education level and aspiration of their young population.

3x increase in average house-hold income over

past six years, improvement in education and

aspiration levels of youth



Sector Comments

Consumer Goods

Our recent rural trip has confirmed that poor monsoon have, indeed,

adversely impacted rural incomes and thus consumer sentiment. Overall we

have drawn three broad conclusions, 1) Incomes from farm activity have

declined in most regions leading to an increased debt burden for famers

though some regions have witnessed higher non-farm incomes partially

negating the fall, 2) General trade stores in most areas have witnessed

flattish to sharp double-digit decline in revenues, 3) Consumer demand for

Ayurvedic products (including Patanjali, Kesh King and Himalaya) have

increased sharply in recent months. Rural demand revival (assuming a good

monsoon year), however, could be more gradual, in our view, as most

farmers would initially apply their incomes towards reducing debt. While

revenue growth is expected to benefit from rural demand recovery and price

hikes, the recovery appears to be largely factored in consensus estimates.

Risk of RM’s being highly inflationary and adversely impacting margin

remains in FY17. High valuations (at c.38x for consumer sector ex-ITC)

would also constrict upside in near-term, in our view.

Reduction in farm incomes has impacted consumption: Poor monsoon has

resulted in lower crop yields as well as lower net sown area adversely impacting

farm incomes. Coupled with this, some regions have also witnessed erratic

weather patterns resulting in crop failures. However, non-farm income has

steadily increased driven by recent pick-up in MGNREGA spending (up 17% in

FY16), rural based development (road construction) and sand mining resuming in

certain regions. This has partially cushioned decline in incomes for people in

rural areas. As overall incomes have declined (especially for large farmers with

higher proportion of farm income), this has led to a sharp deceleration in rural

growth for consumer products.

Exhibit 58. Dry agricultural lands in Marathwada region on poor water

availability leading to sharp decline in agri-income


Despite expectations of improving rural incomes, rural demand recovery

could be more gradual: As per our inferences from conversations with farmers,

their debt burden appears to have increased substantially which is attributable to

either lower crop yields/poor quality or crop failures on erratic weather patterns.

Reduction in farm income during past two years

has impacted consumption across categories



Farmers have, though, diversified their income sources which have helped them

sustain during these adverse times.

As we progress, there is an expectation of good monsoon this year which is

expected to aid in substantially improving rural income. However, given higher

debt burden and recent experience of volatility in weather patterns, farmers are

expected to be more cautious in their expenditures and incremental income is

expected to be first applied towards repayment of debt. Also price hikes on

higher raw material prices could impact volume growth recovery for consumer

companies. Hence we expect overall demand recovery to be more gradual in

FY17.

General trade stores witnessing sharp declines; Ayurvedic products though

performing well: We visited a few rural general trade stores in the regions we

covered in our recent rural trip. In most regions, these stores are witnessing

flattish to single-digit decline in their revenues on decline in incomes. Our survey

reveals that consumers have reduced their household budget by either reducing

frequency of usage of consumer products (for non-premium products) or down-

trading (implies consumers who use both premium and non-premium brands

have now altogether shifted to non-premium brands).

Furthermore, there is also a clear trend of consumer preferences tilting towards

Ayurvedic products. Ayurvedic brands that have witnessed increased popularity

includes Kesh King (Emami), Patanjali, and also Himalaya. While Patanjali

products were competitively priced, Kesh King has gained popularity despite

higher pricing as consumers have found the products to be effective.

Exhibit 59. Ayurvedic brands like Kesh King seeing traction in rural areas; Horlicks, Bournvita, while present in rural

stores, are seeing very low demand at present

Horlicks Sachets on display at a rural general trade outlet Increased traction of ayurvedic brands in rural areas


Patanjali seeing traction in rural areas as well; some contradictory views

also present: We also visited Patanjali stores to understand the acceptance level

for its products in rural regions. Based on our conversations, Patanjali products

appear to have definitely outperformed other consumer brands in that region,

though pace of outperformance appears lower than in urban centres. Our

conversations with the consumers based in those regions have given some

contradictory views like:

Most products used by rural farmers are either homemade (e.g. Ghee)

or derived from nature, hence fascination for Patanjali is not as high

amongst rural consumers.

Ayurvedic products are seeing increased

traction; even in certain rural areas



Some of the Patanjali products like atta (wheat flour) and sugar are not

cheap when compared to the prices that the rural consumers are used

to paying for these products.

Also, there are other Ayurvedic brands like Kesh King and even Himalaya that

are gaining higher consumer acceptance. Given lower level of awe for

Patanjali in these regions, scaling-up presence in rural areas could be a

challenge.

Exhibit 60. Pantanjali products availability being advertised by medical

stores


Price hikes to aid revenue growth; margin expected to be maintained: Given

expectations of La Nina prevailing in FY17, raw material price inflation could

return as discussed earlier section of this report. Our consumer raw material

index has witnessed an uptick recently led by inflation in palm-oil, PFAD, sugar

and crude prices. This implies FY17 could be in complete contrast to FY16

(margin expansion driven earnings growth) for most consumer companies and

revenue growth would be the key driver for earnings. We are expecting revenue

growth to recover on higher realizations and improved volume growth based on

the assumption of FY17 witnessing a good monsoon.

Structural story led by penetration and higher usage remains intact:

Structural story for rural consumption driven by higher rural incomes and high

penetration opportunity remain intact. Rural consumer aspirations have

developed though stress on farm incomes has impacted purchasing power in

recent times. For eg. Health Food Drink brands like Horlicks and Bournvita have

witnessed decline in sales in some rural stores as they are quite expensive.

Similarly many rural consumers have not purchased durables like washing

machines and air-conditioners while even LCD penetration appears very limited.

However, what surprised us was that frequency of painting was much higher for

rural farmers relative to their urban counterpart. As per our survey, as the

income levels increase, most rural farmers resort to higher frequency of

repainting which augurs well for paints demand.

Aspiration level remains high in rural India. Due

to La Nina impact, raw material price inflation

can return



Exhibit 61. High aspirations for improved exteriors in rural areas to aid

demand for paints




Automobiles

Our latest trip across rural hinterlands over the past few weeks (3rd

‘Rural

Safari’ series, 2016) brought to light relatively subdued demand

environment across various consumer discretionary items. During this trip

that coincided with the Rabi season FY16, we observed rural economy to be

impacted by a) unseasonal rainfall (although far less impactful) in parts of

northern India b) lack of proper irrigation facilities in some parts c) price

volatility in certain non-MSP crops (vegetables) d) slowing

momentum/decline in land prices impacting the wealth effect that was seen

earlier. We are not very buoyant on immediate strong recovery given a) 3

consecutive crop failures leading to depletion of savings and increased

indebtedness that would take time to repair b) no sustainable trends

witnessed in construction activities c) subdued sentiments. Consequently

we believe, rural demand for PV is expected to take more time to pick pace

while 2 wheelers being of relatively smaller ticket size may see an uptick on

good monsoons and relatively better Kharif crop. Tractor demand after 2

consecutive years of decline would see some growth largely on weak base

contingent on good monsoons.

Having said that, our trip reassures our belief in the long-term demand

potential and growth drivers of automobiles in the rural/semi-urban India.

As farm mechanization increasingly picks pace, we expect tractor volumes

to grow at a healthy clip over medium-long term. Similarly, given the

structural drivers (like greater aspirations, growing income, better

infrastructure, and lower penetration) in place, we see strong growth

opportunities for both PV and 2-wheeler players. Further, our interaction

with auto companies indicate that they continue to focus on

distribution/marketing set-up in the rural India, highlighting their

commitment to the opportunity called ‘Rural India’.

Exhibit 62. Auto Growth rates over the years

Source: SIAM



Two Wheelers

2-wheelers demand remains subdued after a good festive season in 3QFY16:

2-wheelers continue to be the mainstay for transport in rural/semi urban India.

During our travel across the rural hinterlands, we observed that festive season in

3QFY16 saw a healthy demand pick-up. Keeping up with the customer

sentiments, OEM’s led by Hero Motocorp (HMCL) launched new models/variants.

For example, HMCL launched two new models in the scooters segment such as

‘Maestro Edge’ and ‘Duet’. Bajaj Auto launched ‘Avenger Street 150’ and

upgraded variant of ‘Avenger 220’. These resulted in domestic industry sales of

2 wheelers growing c.8%YoY in Oct-Dec’15 with market leader HMCL growing at

8.5%YoY.

Post the festive season, however demand turned soft with Dec-Jan’16 2-wheeler

demand declining 3%YoY. Our conversations with dealers indicate that overall

demand has softened post festive season on the back of agrarian distress

impacted by third consecutive crop failure due to monsoon deficit.

Exhibit 63. 2 wheeler penetration – Hero remains ubiquitous

Hero extension counter in rural Marathwada region

Hero Splendor and Passion remain popular in tier 3

towns

Source:JM Financial

Strong marriage season to drive demand in 1QFY17: With upcoming marriage

season, gifting would increase leading to improved 2 wheeler demand. We saw a

precursor of possible demand pick-up in Mar’16 (c.11%YoY). Our dealer checks

indicate that wedding season in Apr-May’16 would lead to demand pick-up in

1QFY17.

Scooters continue gaining traction: Scooters continue its robust growth within

2 wheelers. At the industry level, scooters registered c.12%YoY in FY16

compared to largely flattish motorcycle demand. Scooters currently occupy c.25-

30% of the total 2 wheeler demand in many tier-3 towns as against c.10-15% in

villages. At the industry level, scooters constituted c.31% of the total two wheeler

sales in FY16 Vs c.15.5% of domestic 2 wheelers in FY10. Although we believe

scooters will continue to outperform 2 wheelers and occupy a bigger share of the

2 wheeler market, in-line with global trends, villages and smaller towns will take

more time to catch up with this scooterisation trend in the medium-term. Hero

Motocorps new scooters ‘Maestro Edge’ and ‘Duet’ are seeing healthy traction in

all places we visited. Further there are no discounts on HMCL’s scooters.

FY16 saw a subdued 2 wheeler demand even as

scooters continued to gain traction



Exhibit 64. Increasing scooter penetration – Hero’s newly launched scooters well received in the market

Hero Maestro Edge Hero Duet


Rising 2 wheeler financing penetration: Increasingly more customers are

opting for financing over cash purchases in semi-urban areas. The current

penetration is at c.40% and in some areas even more than that. In case of Hero

Motocorp, captive financing from Hero Fincorp is gaining traction, in all the

places we visited. Hero Fincorp is also setting increasingly aggressive credit

growth targets for its employees and rolling out attractive financing schemes on

select models in select markets. Given the up-cycle in 2 wheelers, Hero Fincorp

would benefit from a) increasing volumes b) increasing financing penetration on

the back of declining interest rates c) increasing customer awareness and risk

taking ability and d) gaining market share from other financiers.

Royal Enfield continues to remain ‘aspirational’: Ever since our first rural

safari, we have been observing that Royal Enfield is a strong aspirational

purchase even in tier 3 towns. In-line with the trends in urban areas, we saw

rising traction for RE and a strong desire to own a RE. With economy segment

already well penetrated, our discussions indicated a desire to move to higher

capacities in smaller cities. Within the higher capacity bikes, RE is the only bike

with top-of-the-mind recall due to a) cult brand status b) all metal body while

bigger bikes from many competitors make use of plastic panels. In terms of

immediate competition, like Harley Davidson, network and initial set-up costs

would remain their biggest handicaps.

Black money flow in the system seems to have been curtailed and the same has

affected RE demand in select areas. The recently launched 400 cc bike

‘Himalayan’ created quite some excitement, given the premium ‘adventure

tourer’ positioning, we would have to see if the excitement translates into actual

sales numbers.

Honda motorcycles unable to create excitement: While Honda continues to

remain the market leader in scooters with c.55% market share, they are

struggling to gain market share in motorcycles and their performance in

motorcycles has been far below industry growth. Honda continues to lag industry

despite product quality being on par or slightly better than competition in terms

of technology, design and style elements. During our interactions, we observed

that while ‘Hero’ brand was well entrenched in the minds of buyers, Honda is

way behind in gaining customer mind share. In FY16, at industry level, Honda

domestic motorcycles declined c.15% YoY compared to relatively flat industry

volumes.

Easier access to vehicle finance in rural sector

has led to increased financing penetration



Passenger Vehicles

Overall demand remains soft but in positive territory: Passenger vehicles

grew at a relatively soft pace of 7.5%YoY largely due to rural slowdown. Although

industry leader MSIL reported domestic growth of c.11.5%YoY, rural sales

languished at a mere 9% compared to 22%YoY in FY15 largely due to three

consecutive crop failures. While IMD has forecasted 2016 monsoon at 106% of

the long period average, we expect overall rural passenger demand to remain

soft in the near future. Being high ticket purchase, rural demand for PV is

unlikely to stage a strong comeback even in the event of slightly better

monsoons as a) farmers indebtedness has steadily increased on the back of

agrarian distress b) cash flows in the system are yet to recover meaningfully c)

newer models that are being launched are more attuned to semi-urban than

villages d) black money flow has been curbed in many places.

Exhibit 65. Maruti Suzuki and Hyundai remain the most popular choices in semi-urban/tier 3 towns

Source: JM Financial, Rural Safari

New launches well received in tier 3 towns: New launches from Maruti Suzuki

(‘Vitara Brezza’, ‘Baleno’) and Mahindra and Mahindra (‘TUV300’, ‘KUV100’) have

been well received in tier 3 towns. Maruti ‘Alto’ and ‘Swift’ continue to be the

preferred choice in the segment. In parts of Punjab, ‘Swift’ was a usual marriage

gift amongst relatively wealthy farmers.

During our interaction with auto dealers in tier 3 towns and beyond, we

understood ‘KUV100’ still has a waiting period of 6-8 weeks due to supply

constraints and bookings are growing at a healthy pace. Mahindra UV models

enjoy relatively higher brand recall in tier 3 towns despite the slowdown in key

models (such as ‘Bolero’). However, dealers are not yet sure of the impact of

‘Vitara Brezza’ on the demand for Mahindra ‘TUV300’/’KUV100’. Amongst the

UV’s, Hyundai’s ‘Creta’ is very popular in semi urban areas and has a waiting

period of 3-4 months.

Being high ticket purchase, rural demand for PV

is unlikely to stage a strong comeback in the

near future.



Exhibit 66. New launches from Mahindra and Mahindra have been well received

Mahindra & Mahindra Automobile Showroom in Varanasi Sales volumes of new TUV300 + KUV100

Source:JM Financial

Q3FY16 festivals were better than expectations: Our discussions suggest that

festival demand in Q3FY16 was relatively better than expectations across

multiple places. We believe his may be partly because expectations were reset

and were at all-time low post agrarian failures. Post the festival season, Feb-

Mar’16 saw PV demand soften at c.3%YoY compared to the full year growth at

7.5%YoY.

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

Sep 2015 Oct 2015 Nov 2015 Dec 2015 Jan 2016 Feb 2016 Mar 2016



Tractors

Tractor demand remains weak with hope of better outlook on good

monsoons: Tractor sales continue to remain weak due to agri stress caused by

back-to-back monsoon failures (Monsoon deficit: -12% FY15/-14% FY16).

Domestic tractor industry volumes declined 13%/10.5% YoY in FY15/FY16 on

account of 3 consecutive crop failures. Demand slump was exacerbated by sharp

decline in income levels of farmers due to crop failures even as non-farm income

growth remained sluggish. We observed changing crop patterns in certain

locations, with farmers shifting towards cash crops like vegetables since

traditional crops like paddy demand standing water. This, in turn, impacted

tractor usage as vegetable farming requires lower tractor usage.

While agri demand for tractors experienced a severe slowdown, it is the

delayed/non-recovery in rural/semi-urban commercial segment demand that

worries us even more. In a few states like MP/Punjab, partial restart of mining

has given some respite from the sharp slowdown even as decline in diesel prices

has improved profitability for tractor owners (especially who rent it out).

Exhibit 67. Tractor volumes have declined sharply in FY15 and FY16

Tractor volume trend Domestic Market share (FY16)

Source: Crisil, JM Financial

Tractor demand largely monsoon dependent in many markets: Long term

tractor demand remains intact; however in the near-term tractor demand still

remains monsoon dependent given that 53% of the cropped area is dependent

on monsoons. We expect tractor demand to remain weak in the immediate term

due to a) Rabi crop in FY16 being weak in most parts of the country b) soft

commodity prices c) no significant pick-up in other commercial activities d)

subdued sentiments. We believe a fairly good monsoon and more than one

healthy harvest is required for tractor demand to pick-up meaningfully. During a

recent analyst interaction, industry leader M&M (c.40% market share) indicated

that the company expects only 10% growth for tractors in FY17 on a very weak

base while maintaining avg. long term growth at 6-7%. M&M targets to gain

market share on the back of new launches (such as ‘Yuvo’ series) in the 30-45 HP

segment, like it did in FY16 when it gained c.90bps in tractor market share.

Increasing levels of mechanization: Farm mechanization in India is much lower

than the prevailing levels in developed countries and is the lowest among BRIC

nations. The key reasons are a) higher capital cost of implements compared to

manual labor b) lack of skill required to operate the machinery c) fragmented

land holdings prevent optimum utilization of mechanization. However the spatial

variation across the country reveals varying degrees of usage of farm equipment.

1%

32%

20%

11%

-2%

20%

-13%-10%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

Domestic Tractor Volume change (%YoY)

Tafe, 23%

M&M, 41%

International Tractors, 12%

Escorts, 10%

Others, 13%

Tractor demand may pick up on the back of good

monsoon from a very weak base



Typically farm operations requiring high power inputs and low control are

mechanized first since any power intensive, low control work can be done faster

and more efficiently using mechanical means and at a lower cost whereas the

operations requiring greater degree of control would typically higher capital

costs.

Exhibit 68. Variation in levels of mechanization

Source: FICCI

Punjab, Haryana and western Uttaranchal are major states where farm

mechanization is higher and has resulted in productivity gains. Uttar Pradesh and

Bihar are just beginning to adopt mechanization whereas west Bengal, Orissa and

North east are yet to see meaningful adoption.

a. Typical farm equipment

Exhibit 69. Typically used farm equipment

Source: FICCI

In agriculture, mechanization levels are highest in land preparation (tractors,

levelers, etc.) and harvesting. In other activities the level of mechanization is yet

to reach a meaningful scale. It also varies based on the crop type.

The degree of farm mechanization varies

significantly across Indian states with Punjab,

Haryana and western Uttaranchal leading the

way



b. Crop wise utilization of farm equipment

Some crops are more amenable to mechanization than others. It also varies

based on the regional disparities as observed earlier. As can be seen from the

below exhibit, optimum mechanization (75-90%) is used across most key crops

in the land preparation stage. In wheat, farm implements are used both in

planting and harvesting to c.40% whereas it is much lower for other crops.

Exhibit 70. Crop wise utilization of farm implements

Source: Mahindra and Mahindra, JM Financial

c. Farm implements used for different crops

During our visits in Punjab, we observed that almost every medium-large farmer

used mechanization at various stages of agriculture. While tractors (ploughing)

were the most commonly used farm equipment, combine harvester and seeding

machines were also used by large farmers to improve cost efficiency and

productivity.

Exhibit 71. Farm Implements

Farm implements that can be used in Rice Farm implements that can be used in Sugarcane

Source Mahindra and Mahindra, JM Financial

90

85

95

95

75

5

5

3

45

2

3

2

2

5

13

5

0

2

40

25

0 20 40 60 80 100 120 140 160 180 200

Corn

Cotton

Sugarcane

Wheat

Rice

Land Preparation Planting Crop care Harvesting



At an all India level, other factors driving mechanization include a) MGNREGA

scheme pulling labor away from agriculture b) shift into other non-farm (Services)

sector for better working conditions c) increasing urbanization and migration of

villagers.

Box 12: Farm implements

We met a farmer in a village “Tharan Tharan” on the outskirts of Amritsar. He

owned 20 acres of land and had leased out an additional 25 acres. He cultivated

wheat on 20 acres of land and vegetables (largely potato) on the remaining 25

acres of leased land. While wheat prices have largely remained stable, potato

prices fluctuate depending on market prices. While land rentals per acre are

currently between 42-45k p.a, short duration high margin crops such as

vegetables are key to maintain profitability. He owns 2 Mahindra tractors and a

few farm implements.

What is a Rotavator?

The Rotavator or the Rotary tiller produces a fine seed bed with one or two

passes before and after rain. It is a one-pass Agriculture implement which is

used for the purpose of land preparation in the agriculture fields. It is most

suitable for the removal of stubble sugarcane, wheat, banana, cotton. It retains

soil moisture and increases soil porosity and aeration, which enhance

germination and growth of crops. It is more popular for use in cultivation of

vegetables.

Key advantages

Savings in fuel expenses due to one pass stubble removal and soil

preparation

Soil moisture of previous crop does not go waste

Suitable to use in dry as well as wet land cultivation as well as for

loosening and aerating soil.

Prepares seed bed quickly and economically.

Exhibit 72. Rotavator or Rotary Tiller


He also owns a seed planter machine. The seeds are planted uniformly thereby

ensuring adequate but enough separation between plants. This leads to an

increase in crop density and yield.

Exhibit 73. Seeding machine




Rural NBFC – Pick up in Govt. spending and good

monsoon could lead to strong recovery

We visited MMFS’ and other financier’s branches during our recent rural trip.

Our interaction with branch personnel, dealers and customers indicate

mixed sentiments across regions. While sentiments have improved in

regions like Punjab and Telangana due to a) increase in Govt spending b)

improved outlook for Rabi crop and c) limited impact of unseasonal rainfall

in Punjab; while in regions like Karnataka and Maharashtra the overall

sentiment remained weak due to a) poor monsoon and erratic weather

patterns and b) weakness in non-farm income due to lack of infra activities

in these regions. Three out of the four MMFS regions visited witnessed

improvement in collection efficiencies YoY as on the back of improved

customer cash flow owing to pre-election spending and slight improvement

in crop yield YoY.

Going forward, we believe good rainfall to improve crop yields in FY17.

Further government spending in rural India coupled with pick up in infra

activities should improve non-farm income. Thus FY17 will be a year of

consolidation thereby setting the base for rural growth revival in FY18.

Takeaways from MMFS management about its performance in different

states: The last two years have been difficult for MMFS, with its gross NPLs

increasing from 3% to around 8% in FY16. It has a major presence in nine large

states, namely Uttar Pradesh, Andhra Pradesh, Bihar, Karnataka, Kerala,

Maharashtra, and Madhya Pradesh, Rajasthan, Telangana and Tamil Nadu.

According to the bank’s management team, economic growth in Andhra

Pradesh, Bihar, Rajasthan, Telangana and Uttar Pradesh has been stable over

the past 3-4 quarters mainly due to the infrastructure drive that has been

initiated by respective state governments in these regions. Madhya Pradesh

also witnessed improevement where farmers were impacted due to delayed cash

flows from their crops. In Tamil Nadu, paddy harvest was good after Pongal and

cash flows have improved due to better selling price. In Assam, coal that was

already excavated in last 8-10 months have got approval for transportation

leading to improvement in cash flows.

States like Maharashtra and Karnataka which have seen bad monsoons continue

to be under stress. While Maharashtra has witnessed good grapes and orange

crop, Marathwada is still under stress. Karnataka has had to deal with other

problems, including the mining ban and the lack of a pickup in economic

activity. A slowdown in the steel industry due to Chinese exports and low

international steel prices has impacted mining activity, which has had a knock-on

effect on the rural economy in Karnataka. In Kerala, the rural economy has been

impacted by lower rubber prices and the significant slowdown in remittances

from workers in the Middle East.

Budget proposals encouraging, Monsoon key: Several measures were

announced by the Govt. in this budget to respond to weakness in rural economy

including 1) Increase in budget outlay for NREGA schemes (11% YoY), rural

development (26.5% YoY) and agriculture and allied services (79.9% YoY), 2)

Targeting to double farmers’ earnings in 5 years via a series of measures such as

transparent procurement system, increase area under irrigation, comprehensive

crop insurance scheme, improved market access and better road connectivity.

While these measures are positive, entire impact of these would be visible only in

FY18 if monsoon turns out to be good to normal. There would be positive impact

of 7th

pay commision as well which is likely to improve its customer cash flows

Sentiments have improved in regions like Punjab

and Telangana, while it remains weak in regions

like Karnataka and Maharashtra



In the last 50 years monsoons have never failed for three consecutive years:

Two weak monsoons and three continuous crop failures have drained farmers’

savings and have severely impacted rural economy. However, in the last 50 years

monsoons have never failed for three consecutive years. IMD predicts good

monsoon this year which would mean average to above average rainfall in India.

Pickup in CV growth trend is encouraging; however tractor sales remain

sluggish: While M&HCV demand has recovered sharply (30% in FY16), LCV

volumes are still flat YoY and car volume growth has improved to 8% YoY in FY16

driven by new products. Tractor volumes however have been under pressure for

last 2 years and despite a low base; FY16 tractor sales have declined by 11% YoY,

impacted by deficient rainfall, lower crop realization, weak construction & allied

activities and changing crop patterns. Consequently MMFS tractor disbursements

have declined 9% YoY in FY16 while UV disbursements have been sluggish (3%

YoY). Car disbursement growth was however encouraging with 16% YoY.

Exhibit 74. Trend in Vehicle sales vs. disbursements – YoY%

Tractor volumes have declined sharply in last few months but

is gradually picking up

Last 2 quarters have seen positive growth in MHCV sales,

while LCV growth remains under pressure

Source: CMIE

Exhibit 75. Trend in Vehicle sales vs. disbursements – YoY%

Car volumes have declined sharply in last few months but is

gradually picking up

UV volumes have declined sharply in last few months but is

gradually picking up

Source: CMIE

Pick up in infra activities will be key growth driver for rural India:

Government has stepped up spending on infrastructure related projects sharply

by increasing allocation to roads and Rural infrastructure. The government has

proposed a total outlay of Rs1,333bn in roads including Rs190bn under Pradhan

Mantri Gram Sadak Yojana for rural roads. The increased pace of rural road

construction would be the key growth driver for rural India. Going forward, we

-40%

-20%

0%

20%

40%

60%

80%

FY10

FY11

FY12

FY13

FY14

FY15

FY16

MMFS Tractors Disbursement Industry Domestic Tractor volume

M&M Domestic Tractor volume

-40%

10%

60%

110%

160%

FY10

FY11

FY12

FY13

FY14

FY15

FY16

MMFS CV/CE Disbursement (YoY%) LCV volume (YoY%)

MHCV volume (YoY%)

-40%

-20%

0%

20%

40%

60%

80%

100%

FY10

FY11

FY12

FY13

FY14

FY15

FY16

MMFS Car disbursement (YoY%) Car volume (YoY%)

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

FY10

FY11

FY12

FY13

FY14

FY15

FY16

MMFS Auto/UV disbursement (YoY%) UV volume (YoY%)

Tractor sales remain sluggish; consequently

MMFS tractor disbursements have declined 11%

YoY



believe normal rainfall should support crop output and improve crop yields.

Further government spending in rural India coupled with pick up in infra

activities should improve non-agri income for farmers. Thus FY17 will be a year

of consolidation and pickup in rural economy if any could be seen only in FY18.

Long term structural drivers intact for rural economy: Given weak sentiment

in farming and lower income levels, consumption demand in the near term looks

subdued. However, we believe long term structural trends for rural India remain

firm - (a) increasing profitability through cash crops and allied activities, (b)

increase diversification through non-farming income, (c) targeted direct benefit

transfer, and (d) usage of higher mechanization and awareness of technical

advancements.

Estimates remain conservative; expect some pickup in AUM growth only in

FY18: We expect FY17 to be a year of consolidation and our estimates remain

conservative. For eg. In case of Mahindra Finance (MMFS) we are factoring 11%

growth in AUM for FY17E. However in FY18E we are factoring pick up in AUM

growth at 16%. For NBFCs under coverage we expect 16-29% growth in AUM in

FY18E as shown below.

Exhibit 76. AUM Growth trends in NBFCs under coverage


Prefer SHTF, CIFC and MMFS as top picks amongst CV financing and rural

NBFC

We expect CV financiers to be key beneficiaries of improvement in economic

activity and prefer Shriram Transport as top pick in CV financing space. We

believe MMFS is well placed to benefit from rural recovery assuming normal

monsoon and pick up in government spending and prefer Mahindra Finance as

top pick in rural space.

Exhibit 77. Peer Valuations

ROA (%) ROE (%) P/B P/E

FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E

SHTF 2.3% 2.2% 2.2% 2.3% 14.1% 14.3% 15.1% 16.8% 2.4 2.1 1.9 1.6 17.7 15.6 13.1 10.4

MMFS 2.5% 1.8% 2.0% 2.4% 15.5% 11.5% 13.4% 16.1% 3.0 2.8 2.5 2.3 20.4 25.2 19.9 14.9

SCUF 3.2% 3.4% 3.4% 3.5% 16.0% 15.2% 16.0% 17.0% 2.7 2.4 2.1 1.8 19.6 16.5 13.8 11.4

BAF 3.1% 3.3% 3.2% 3.1% 20.4% 21.0% 20.2% 21.2% 7.3 4.9 4.1 3.4 38.8 28.7 21.9 17.4

CIFC 1.9% 2.1% 2.3% 2.4% 17.5% 17.1% 16.8% 18.1% 4.3 3.4 3.0 2.5 26.3 23.0 18.9 15.1

Source: Company, JM Financial, Valuations as on 28th

April 2016

-20%

0%

20%

40%

60%

80%

100%

FY11

FY12

FY13

FY14

FY15

FY16

E*

FY17

E

FY18

E

BAF CIFC MMFS SCUF SHTF

FY17 is expected to be year of consolidation and

AUM growth is factored from FY18 onwards



Box 13: Punjab MMFS branch visit summary (Amritsar and Ferozpur)

Rabi crop has been better this year in most parts of Punjab and there is very

limited impact of unseasonal rainfall this year. MMFS has witnessed

improvement in collection efficiencies and asset quality has improved

signficantly as some critical NPLs have closed down in Q4. There is some

improvement in MMFS customer cash flow due to pre-election spending and

slight improvement in crop yield YoY.

Crop outlook:

1. Most of the area under agriculture is irrigated (canals and tube wells) and

there is very little dependence on monsoons. Unseasonal rainfall during mid-

march has had very little impact on the Rabi wheat crop production.

2. Many farmers have taken up cultivation of vegetables (mainly potato) to

supplement regular farm income. Vegetables are a short duration crop and

hence farmers can rotate multiple crops. Further the profit margin on

vegetables is much higher (>50%). But the realization is subject to market

forces and hence volatile.

3. Wheat (Rabi), Rice (mostly Kharif) and Potato are 3 major crops. Govt has

announced MSP for wheat at Rs 1525/qtl (+5%YoY). Basmati Rice prices

declined from Rs3000 per qtl to Rs1500-1600/qtl during the last Kharif on

bumper harvest and Iran’s ban on rice import from India. Now the Basmati

rice prices have picked up.

4. Contract farming is also on the rise as farmers get assured return on the

crop. Such practices are mainly done for crops like Peas, Capsicum and

Chicory

MMFS customer cash flow: MMFS customer’s cash flow has witnessed some

improvement in last 6 months due to:

a) Govt. spending has improved due to elections next year. Metro, Bridge

construction and Bus corridor work has started in Amritsar,

b) Payments to CV/CE brokers have been released,

c) Basmati Rice and potato wholesale price (crop sold to grain merchants) has

improved YoY while sugarcane mills are getting timely payment from Govt.

now and

d) Partial lifting of sand mining ban – Govt of Punjab had banned sand mining

3 years back due to which farmer side income from sand mining (who use

to mine sand from their farms) was impacted. Govt. has now partially

allowed sand mining positively impacting customer’s cash flow

Asset Quality: Collection efficiency has improved to 98% compared to 94%

YoY (Amritsar Branch) while it has improved to 107% vs 98% YoY in Ferozpur

branch. Most importantly, some critical NPL have closed down this year.

Muted growth trends: Growth continues to be a challenge as Tractor demand

is sluggish and is unlikely to improve for next 2 crop seasons.

Cash flow has improved in Punjab driven by pre-

election spending and partial lifting of sand

mining ban. Tractor sales however, are not

expected to improve at least for next 2 crop

cycles



Exhibit 78. Visit to MMFS customers in Amritsar and Ferozpur

Punjab agri economy is dependent on canals and tube wells

for farming, also electricity is free for farmers

Outlook on Rabi Crop output in Punjab is favourable this year



Vegetable production has been encouraging…. Reliance on non-farm income has picked up in last 2-3 years



Increase in MSP prices for wheat crop this year has positively

impacted customers cash flow

… along with pick up in construction activities as pre-election

expenditure has picked up




Box 14: Pickup in construction activities is positive. However, cash flow

recovery is atleast 2 crop cycles away - Mahindra Finance’s

Hanamakonda (Warangal) and (Mandya) Karnataka branch visit

Karnataka

Farmers switching to lower yielding alternate crops as reservoir level

dips due to poor monsoons - The main crops in the area are cotton,

sugarcane, paddy, tobacco, ginger and turmeric. Poor monsoons and lower

reservoir levels in Karnataka have made the irrigation unfit for crops like

cotton and sugarcane forcing the farmers to grow lower yielding crops like

pulses and coarse cereals.

Poor rainfall has badly affected customer’s cash flow: Three consecutive

poor rainfalls have badly affected farmers’ cash flow and recovery has been a

challenge in these areas. Cash flows have also been under pressure due to

closing down of sugar factories especially in Mandya region. As per MMFS

personnel, it could take at least 2 good crop cycles for the situation to

improve.

Telangana

Tractor growth picking up driven by increase in irrigation projects: While

Govt. spending in Karnataka is muted (barring few lake projects); Telangana is

witnessing increased activities in irrigation projects. This has led to increase

in employment in these areas and increase in tractor usage - MMFS Warangal

branch has witnessed 50% YoY growth in tractors aided by rise in construction

activities.

Telangana has seen increased activities

in irrigation projects driving upwards

tractor usage



Cement – Monsoons to trigger pent-up demand

Rural housing is a significant driver of cement demand contributing to c.40%

of the total demand. Given significant housing short-fall, still below par

penetration of “pucca” houses in rural India and structural uptick in rural

wage levels, we believe in the medium to long term rural sector will remain

the key driver of cement demand and could outpace urban demand. In the

last two years though, with the rural economy slowing down considerably

and with decline in rural income levels, cement demand was particularly

negatively impacted as rural housing spend were cut considerably. We

expect a potential revival in the upcoming year driven by potentially good

monsoon, uptick in government spending and pent-up demand kicking-in.

Last two years have seen significant slowdown in rural cement demand: Our

discussions with various players in the cement value chain suggest that in the

last two years, demand from the rural housing side for cement consumption

slowed considerably impacted by several factors. With the slowdown in economy,

rural income has been particularly impacted (declining in the last two years).

Poor monsoons have compounded the matter further. Housing sector spending

being large ticket and discretionary in nature bore the brunt of slowdown.

Several factors points towards potential revival: We expect a revival in the

cement demand in the rural sector going forward on back of:

Normal monsoon forecast: After two successive years of poor monsoon,

India Meteorological Department (IMD) has forecasted a slightly higher than

expected monsoon in the upcoming season. This should bring in the much

needed relief and boost the rural income and stimulate demand for housing.

Uptick in Government spending: The impact of increased government

spending has already started to show-up in increased demand from

infrastructure sector for the cement players. With government’s focus on

rural irrigation and housing schemes, these segments are also expected to

start contributing to demand in the near term

Multiplier effect of infrastructure spending: The sharp uptick in

infrastructure related spending is likely to have a strong multiplier effect as

it will help boost earnings of labor force.

Pent-up demand: Demand in the cement sector tends to be cyclical to a

certain extent. Having suffered a significant slowdown in last two years and

grown lower than GDP, pent-up demand is likely to kick-in sooner or later.

Interest rate reduction: Reducing interest rate scenario should also help

even though housing finance penetration in rural market remains low

Structural drivers’ remains intact: Rural housing is a significant driver of

cement demand contributing to c.40% of the total demand. We believe rural

economy will continue to be a significant driver of cement demand over the

medium to long term given: (1) rural housing shortfall continues to be high at

c.43.7mn units (as per census data); (2) a vast majority of rural houses (over

50%) are still non-concrete or Katcha - increasingly there has been a shift towards

pucca houses; (3) the disparity on physical infrastructure in rural areas vs urban

is stark in India - various government schemes are targeted towards bridging the

gap to certain extent; (4) Rural wages have continued to rise sharply in the last

decade (barring last few years), which help boost demand for discretionary spend

like housing.



Exhibit 81. Cement demand – Rural demand is an important demand driver

Rural housing contributes c.40% to the cement demand; rural infrastructure is an additional driver

Rural housing continues to form a c.40% of the demand Rural wage rate continues to increase

Lowering of interest rate to stimulate housing demand Eyes on rainfall, would add fuel to rural demand

Source: CRISIL, JM Financial.

Exhibit 82. India – Pucca houses

Growth in pucca houses is higher than the growth in total number of houses

2001 Census 2011 Census

Total Rural Urban Total Rural Urban

Total number of census houses (mn) 249 178 72 305 207 98

Pucca roof houses (%) 48 37 75 62 52 83

Pucca wall houses (%) 59 49 84 67 58 88

Pucca floor houses (%) 44 29 83 54 37 88

Growth (%)

Total number of census houses

2.0 1.5 3.2

Pucca roof houses

4.7 5.1 4.2

Pucca wall houses

3.4 3.2 3.8

Pucca floor houses

4.0 4.2 3.9

Source: Census, JM Financial.

Commerical & Industrial

Construction, 21.0%

Infrastructure, 20.0%

Rural Housing, 40.00%

Urban Housing,

19.0%

0.6%

5.7% 5.6%

8.2%

11.8%

16.2%

19.2% 18.9%17.9%

27.9%

10.9%

0%

5%

10%

15%

20%

25%

30%

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

Wage grwoth rate (%)

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

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Jan-

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Jan-

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Jan-

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Jan-

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Jan-

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Jan-

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Jan-

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Jan-

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Jan-

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Jan-

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Jan-

16

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

FY

90

FY

91

FY

92

FY

93

FY

94

FY

95

FY

96

FY

97

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

P

FY

17

E

Rainfal - (in % Depature) Cement demand growth (%)


Govt. spending and normal monsoon could lead to

strong recovery

MMFS asset quality has been adversely impacted in last 2 years due to 2

consecutive poor monsoons, decline in Infra spending and slowdown in rural

economy. However company has shown strong resilience and strong

recoveries in Q4 have resulted in significant improvement in its asset quality

with GNPL ratio improving to 7.9% (vs. 9.9% in 3Q16) and coverage ratio

remaining high at 62% despite migrating to 120DPD. Subsidiary performance

have been healthy with housing subsidiary witnessing 56% CAGR growth in

last 3 years and management expects similar growth trends to continue as it

expects c.25% of business to come from semi-urban market. We believe

MMFS is well placed to benefit from rural recovery assuming normal

monsoon and pick up in government spending. Maintain BUY with revised TP

of Rs345. Key Risk – Poor monsoon

Budget proposals encouraging, execution of these measures and

monsoon holds the key: Measures announced by Government in the budget

include a) increase in budget outlay for NREGA schemes, rural development

and agriculture & allied services, b) targeting to double farmers’ earnings in 5

years via a series of measures such as transparent procurement system,

increase area under irrigation, etc. MMFS will be a significant beneficiary of

rural recovery from FY17 onwards. While near term outlook remains weak, we

expect recovery from FY17 driven by govt capex. Management continues to

invest in distribution which bodes well for growth and recovery from a

medium term perspective. Longer term, growth would be driven by car, CV

and SME segment. We expect 14% CAGR in NII over FY16–18E with slight

improvement in margins.

Provision coverage remain healthy at 62% despite migration to 120DPD:

Company’s focus on recoveries resulted in significant improvement in its

asset quality as GNPL ratio on AUM basis improved to 7.9% in 4Q16 (vs. 9.9%

in 3Q15) despite migrating to 120DPD. Coverage ratio remained high at 62%.

In the long run we expect remain asset quality to remain stable due to a)

Rural economy no longer depends only on the agri output but has diversified

cash flows driven by government spending b) Change in customer profile

from farmers to non--farmers such as contractors, construction developers

etc. c) Change in MMFS's collection and sourcing policy with separate teams

for sourcing and collection d) Earlier tractor was purely used for farming

purpose while now c.50% of tractor usage is non–farm purpose which is less

cyclical in nature. However in short term we expect asset quality pressure to

continue. We have factored credit costs of 240bps/195bps in FY17/18E.

Despite slowdown, investment in distribution network continues: MMFS

has added 510 branches in last 2 years (which is 44% of its existing branch

network). Despite slowdown in the business, continuous investment in

distribution network augurs well for the company. Investment in distribution

network should continue, aiding collection initially and supporting growth

later. We believe that MMFS is building a long term strategy to improve its

franchise which will benefit the company by 1) improving collection efficiency

initially by getting closer to the customers 2) later these branches will be used

for sourcing loans once the cycle picks up 3) deeper penetration would give

MMFS first mover advantage.

Subsidiaries to add significant value: a) Housing Finance - portfolio has

grown at 56% CAGR in last 3 years and its AUM proportion to the

consolidated AUM has increased to 7.4% (vs. 4% in FY14). Company has now

also started focusing on higher ticket size loans and management believes

growth momentum will continue and expects 50% growth over the next 2

years. b) AMC Business - will focus on rural and semi-urban markets with

Karan Singh, CFA, FRM

[email protected]

Tel: (91 22) 66303082

Nikhil Walecha

[email protected]

Tel: (91 22) 66303027

Ruchika Birla

[email protected]

Tel: (91 22) 6630 3263

Puneet Gulati

[email protected]

Tel: (91 22) 66303072

Jayant Kharote

[email protected]

Tel: (91 22) 6630 3099

Key Data

Market cap (bn) ` 156.8 / US$ 2.4

Shares in issue (mn) 563.5

Diluted share (mn) 563.5

3- mon avg daily val (mn) ` 338.4/US$ 5.1

52- week range ` 294.3/173.1

Sensex/Nifty 25,838/7,899

`/US$ 66.5

Daily Performance

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

0

50

100

150

200

250

300

350

400

Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16

M&M Financial

M&M Financia l Relati ve to Sensex (R HS)

% 1M 3M 12MAbsolute 14.6 38.1 -0.5

Relative 12.6 32.4 6.9

* To the BSE Sensex

Shareholding Pattern (%)

D ec-15 D ec-14

Promoters 52.0 52.0

FII 34.0 41.6

DII 9.4 1.4

Public / Others 4.6 4.9

M&M Financial | MMFS IN

4 May 2016

India | NBFC

Price: Rs276

BUY

12M Target: Rs345








Certification.

M&M Financial 4 May 2016


capital protection products and group employees leveraging further on

parent M&M‘s relationship to sell these products.

Significant improvement in financial performance for MMFS will be

visible in FY18 if rural economy recovers; Maintain BUY with TP of Rs345:

We expect earnings CAGR of c.30% over FY16–18E and return ratios with ROA

of 2.4% and ROE of 16% by FY18E. We value MMFS standalone at 2.4x Mar’18

BV implying value of Rs316. We value MRHF at Rs15 per share while MIBL at

Rs14 per share, implying TP of Rs345.

E 1.Vicky

M&M Financial 4 May 2016


Financial Tables (Standalone)

Profit & Loss (` Mn) FY14 FY15 FY16 FY17E FY18E

Net Interest Income (NII) 27,382 30,477 32,289 36,434 41,882

Non-Interest Income 268 403 369 407 460

Total Income 27,650 30,880 32,658 36,841 42,343

Operating Expenses 9,134 10,068 11,781 13,561 15,533

Pre-provisioning Profits 18,516 20,811 20,877 23,280 26,809

Loan Loss Provisions 4,847 8,169 10,297 10,193 9,339

Other Provisions 211 106 198 158 268

Total Provisions 5,058 8,275 10,495 10,351 9,607

PBT 13,458 12,536 10,382 12,929 17,203

Tax 4,585 4,219 3,656 4,396 5,849

PAT (Pre-Extra ordinaries) 8,873 8,318 6,726 8,533 11,354

Extra ordinaries (Net of Tax) 0 0 0 0 0

Reported Profits 8,873 8,318 6,726 8,533 11,354

Dividend 2,515 2,717 2,713 2,731 3,633

Retained Profits 6,358 5,601 4,013 5,802 7,721


Balance Sheet (` Mn) FY14 FY15 FY16 FY17E FY18E

Equity Capital 1,127 1,128 1,129 1,129 1,129

Reserves & Surplus 49,728 55,402 59,588 65,390 73,111

Stock Option Outstanding 87 164 164 172 181

Shareholders' Equity 50,942 56,694 60,881 66,692 74,421

Preference Share Capital 0 0 0 0 0

Borrowed Funds 239,306 262,633 294,400 327,373 383,517

Deferred tax liabilities 0 0 0 0 0

Current Liabilities 26,409 31,414 40,514 44,937 52,220

Total Liabilit ies 316,657 350,741 395,795 439,001 510,158

Loans & Advances 296,170 329,298 366,578 406,119 473,041

Investments 8,692 8,537 14,833 16,651 18,922

Intangible Assets 0 0 0 0 0

Cash & Bank Balances 6,892 7,038 5,890 6,904 7,805

Other Current Assets - CA 558 616 1,506 1,577 1,639

Fixed Assets 1,195 1,101 1,135 1,259 1,463

Miscellaneous expenditure 0 0 0 0 0

Deferred Tax Asset 3,151 4,153 5,853 6,492 7,289

Total Assets 316,657 350,741 395,795 439,001 510,158


Key Rat ios (%) FY14 FY15 FY16 FY17E FY18E

Growth (YoY) (%)

Borrowed Funds 26.8% 9.7% 12.1% 11.2% 17.2%

Advances 23.2% 11.2% 11.3% 10.8% 16.5%

Total Assets 24.2% 10.8% 12.8% 10.9% 16.2%

NII 21.4% 11.3% 5.9% 12.8% 15.0%

Non-Interest Income 25.7% 50.2% -8.2% 10.1% 13.2%

Operating Expenses 23.1% 10.2% 17.0% 15.1% 14.5%

Operating Profits 20.7% 12.4% 0.3% 11.5% 15.2%

Core Operating Profits 20.9% 12.1% 0.3% 11.5% 15.2%

Provisions 78.5% 63.6% 26.8% -1.4% -7.2%

Reported PAT 0.5% -6.3% -19.1% 26.9% 33.1%

Yields / Margins (%)

Interest Spread (%) 7.28% 6.94% 6.55% 6.70% 6.87%

NIM (Inc l. securitization) (%) 9.73% 9.28% 8.82% 8.92% 9.01%

Profitability (%)

ROA (%) 3.10% 2.49% 1.80% 2.04% 2.39%

ROE (%) 18.6% 15.5% 11.5% 13.4% 16.1%

Cost to Income (%) 33.0% 32.6% 36.1% 36.8% 36.7%

Assets Quality (%)

Gross NPAs (%) 4.62% 6.14% 8.34% 10.00% 9.71%

LLP (%) 2.19% 3.02% 3.56% 2.68% 2.19%

Capital Adequacy (%)

Tier I (%) 16.29% 15.50% 14.61% 14.69% 14.15%

CAR (%) 18.63% 18.30% 17.31% 17.52% 16.96% Source: Company, JM Financial

Du-pont Analysis (%) FY14 FY15 FY16 FY17E FY18E

NII / Assets (%) 9.58% 9.13% 8.65% 8.73% 8.83%

Other income / Assets (%) 0.09% 0.12% 0.10% 0.10% 0.10%

Total Income / Assets (%) 9.68% 9.25% 8.75% 8.83% 8.92%

Cost to Assets (%) 3.20% 3.02% 3.16% 3.25% 3.27%

PPP / Assets (%) 6.48% 6.24% 5.59% 5.58% 5.65%

Provisions / Assets (%) 1.77% 2.48% 2.81% 2.48% 2.02%

PBT / Assets (%) 4.71% 3.76% 2.78% 3.10% 3.62%

Tax Rate (%) 34.07% 33.65% 35.21% 34.00% 34.00%

ROA (%) 3.10% 2.49% 1.80% 2.04% 2.39%

Leverage (%) 6.0 6.2 6.4 6.6 6.7

ROE (%) 18.62% 15.49% 11.47% 13.41% 16.13%


Valuat ions FY14 FY15 FY16 FY17E FY18E

Shares in issue (mn) 563.5 564.1 564.5 564.5 564.5

EPS (Rs.) 15.7 14.7 11.9 15.1 20.1

EPS (YoY) (%) 0.4% -6.4% -19.2% 26.9% 33.1%

PE (x) 17.5 18.7 23.1 18.2 13.7

BV (Rs.) 90 100 108 118 132

BV (YoY) (%) 14% 11% 7% 10% 12%

P/BV (x) 3.05 2.74 2.56 2.33 2.09

DPS (Rs.) 4.5 4.8 4.8 4.8 6.4

Div. y ield (%) 1.6% 1.8% 1.7% 1.8% 2.3% Source: Company, JM Financial


Attractive play on rural recovery

Over the last two years, while domestic 2 wheeler industry witnessed sub-par

growth, Hero Motocorp (HMCL) commendably held on to its market share (at

c.40%) despite extremely fierce competition. While the competitive landscape

may not change significantly, we believe HMCL has weathered two most

serious threats (weak rural demand + aggressive launches from peers) better

than expectations. We expect HMCL to deliver healthy 13.5% earnings CAGR

during FY16-18E driven by a) robust growth in scooters (22% CAGR), b) rural

demand recovery on better monsoon, c) benefits of deep network penetration,

and d) improving profit margins. We believe HMCL is at the cusp of an up-cycle

led by rural recovery and we rate the stock as BUY.

HMCL enjoying commendable market share strength, led by scooters:

Although domestic motorcycle demand has been weak, HMCL has

commendably held on to its market share at c.53%, despite weak rural

economy. The same remains enviably strong at c.40% in the total 2- wheeler

segment as well. In scooters, HMCL has grown its market share to c.20%

currently from c.15% at the beginning of FY16. It dominates the domestic

executive motorcycle space, which constitutes c.65% of the domestic

motorcycle market and should aid growth as rural demand recovers.

Multiple levers for growth: In our view, HMCL’s volume growth would be

driven by - a) improvement in rural economy on better monsoons post two

years of agrarian crisis and govt. led initiatives to protect farmer’s income (pent

up demand), b) strong comeback in fastest growing scooters category, c) Slew

of launches/refreshes supported by renewed thrust on in- house R&D, and d)

deep network penetration, way ahead of its peers.

Profitability improvement ahead of competition: HMCL's EBITDA margin over

the last 4 quarters has improved to 15.6%, an expansion of 360bps ahead of

BJAUT (-60bps) and TVSL (+110bps). The LEAP program has contributed 80bps

improvement to margin in 9MFY16. We believe benign input costs and cost

control measures should help maintain margin at c.15% levels. With bulk of the

initial R&D capex behind us, we expect R&D spend to normalize ensuring

healthy cash flows with stable ROE at a strong c.40%.

Risk-reward in favor: HMCL is currently trading at 14.4x FY18E PER, a c.15%

discount to its 5-yr avg. With multiple growth triggers led by a highly probable

upswing in rural economy, we estimate earnings to grow at 13.5%CAGR FY16-

18E driven by 9.5%CAGR volume growth. 1.

Hero Motocorp | HMCL IN

4 May 2016

India | Auto

Exhibit 1: Financial Summary (Rs mn)

Y/E March FY14A FY15A FY16E FY17E FY18E

Net sales 251,249 273,506 283,158 318,594 359,939

Sales growth (%) 6.5 8.9 3.5 12.5 13.0

EBITDA 33,895 33,075 43,077 46,933 54,948

EBITDA (%) 13.5 12.1 15.2 14.7 15.3

Adjusted net profit 21,091 25,407 31,306 34,124 40,261

EPS (Rs) 105.6 127.2 156.8 170.9 201.6

EPS growth (%) -0.4 20.5 23.2 9.0 18.0

ROCE (%) 39.1 42.2 46.1 45.6 49.4

ROE (%) 39.8 41.9 43.3 39.8 40.0

PE (x) 27.4 22.8 18.5 17.0 14.4

Price/Book value (x) 10.3 8.8 7.3 6.3 5.3

EV/EBITDA (x) 15.8 16.5 12.4 11.2 9.2

Source: Company data, JM Financial. Note: Valuations as of 02/05/2016

Ambrish Mishra

[email protected]

Tel: (91 22) 66303019

Shyam Sundar Sriram

[email protected]

Tel: (91 22) 66303077

Key Data

Market cap (bn) Rs 578.6 / US$ 8.7

Shares in issue (mn) 199.7

Diluted share (mn) 199.7

3-mon avg daily val (mn) Rs 1333.6/US$ 20.1

52-week range Rs 3172.0/2251.3

Sensex/Nifty 25,607/7,850

Rs/US$ 66.3

Daily Performance

-10%

0%

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30%

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60%

0

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1500

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3500

Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16

Hero MotoCorp

Hero MotoCorp Relative to Sensex (RHS)

% 1M 3M 12M

Absolute 1.4 12.9 22.1

Relative* -1.4 10.0 28.1

* To the BSE Sensex

Shareholding Pattern (%)

Dec-15 Dec-14

Promoters 34.6 39.9

FII 41.9 39.3

DII 14.6 7.4

Public / others 8.9 13.3

Source: BSE

Price: Rs2,897

BUY

12M Target: Rs3,470








Certification.

Hero Motocorp 4 May 2016


SWOT Analysis

Exhibit 2. SWOT

Strengths Weaknesses

Market leader in 2 wheelers with steady c.40% market share. Dominance in

the executive segment which constitutes c.65% of the motorcycle segment.

Increasing market share (c.20% now) in fastest growing scooters segment.

Deep Network penetration that provides a distinctive competitive advantage.

Growing profitability in terms of margin expansion (360bps over 4qtrs)

Weak product portfolio in premium motorcycles.

Yet to establish strengths in R&D.

Opportunities Threats

Scooter growth outpacing 2 wheeler growth and increasing penetration.

Increasing premiumisation of motorcycles, even within 100/110 cc models.

Expansion into new global markets.

High competitive intensity.

Significant capacity addition in 2-wheeler segment may put

pressure on pricing.

Weakness in rural economy.


Focus Charts

Exhibit 3. Focus Charts

Defending market share in domestic motorcycles Strong traction in scooters

40

44

48

52

56

60

0

100

200

300

400

500

600

Apr

-14

May

-14

Jun-

14

Jul-1

4

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb

-16

Mar

-16

Uni

ts in

'000

HMCL Dom. Motorcycle Volume HMCL Motorcycle Market Share (RHS, %)

10

15

20

25

0

20

40

60

80

100

120

Apr

-14

May

-14

Jun-

14

Jul-1

4

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb

-16

Mar

-16

Uni

ts in

'000

HMCL Dom. Scooters volume HMCL Scooters Market Share (RHS, %)

Monsoons unlikely to play truant post 2 deficit years Deep network penetration ahead of peers

Healthy expansion in EBITDA margin Stable ROE with improving free cash flow

-60 bps

110 bps

360 bps

500 bps

-5%

0%

5%

10%

15%

20%

25%

30%

35%

Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16

HMCL BJAUT TVSL EIM - SA

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

0

5

10

15

20

25

30

35

40

45

FY14A FY15A FY16E FY17E FY18E

Free cash flow (Rs bn) ROE (%, RHS)


Hero Motocorp 4 May 2016


Financial Tables

Profit & Loss (Rs mn)


Net sales (Net of excise) 251,249 273,506 283,158 318,594 359,939

Growth (%) 6.5 8.9 3.5 12.5 13.0

Other operational income 0 0 0 0 0

Raw material (or COGS) 182,299 197,539 193,256 219,033 248,358

Personnel cost 9,300 11,729 13,082 14,257 16,017

Other expenses (or SG&A) 25,755 31,163 33,744 38,370 40,616

EBITDA 33,895 33,075 43,077 46,933 54,948

EBITDA (%) 13.5 12.1 15.2 14.7 15.3

Growth (%) 9.4 -2.4 30.2 9.0 17.1

Other non-op. income 5,474 6,784 4,749 5,223 6,007

Depreciation 11,074 5,400 4,465 5,375 6,137

EBIT 28,296 34,459 43,360 46,781 54,818

Add: Net interest income 377 380 242 286 334

Pre tax profit 28,672 34,838 43,602 47,067 55,152

Taxes 7,582 9,432 12,296 12,943 14,891

Add: Extraordinary items 0 -1,550 0 0 0

Less: Minority interest 0 0 0 0 0

Reported net profit 21,091 23,856 31,306 34,124 40,261

Adjusted net profit 21,091 25,407 31,306 34,124 40,261

Margin (%) 8.4 9.3 11.1 10.7 11.2

Diluted share cap. (mn) 200 200 200 200 200

Diluted EPS (Rs.) 105.6 127.2 156.8 170.9 201.6

Growth (%) -0.4 20.5 23.2 9.0 18.0

Total Dividend + Tax 15,199 14,019 17,524 21,028 23,365


Balance Sheet (Rs mn)


Share capital 399 399 399 399 399

Other capital 0 0 0 0 0

Reserves and surplus 55,599 65,014 78,797 91,892 108,788

Networth 55,999 65,414 79,196 92,291 109,187

Total loans 245 313 313 313 313

Minority interest 0 0 0 0 0

Sources of funds 56,243 65,727 79,510 92,605 109,501

Intangible assets 0 0 0 0 0

Fixed assets 69,089 84,104 94,809 110,893 117,220

Less: Depn. and amort. 46,657 52,057 56,521 61,897 68,034

Net block 22,433 32,047 38,287 48,997 49,186

Capital WIP 8,541 4,205 7,585 3,327 3,517

Investments 40,888 31,541 36,041 40,541 47,541

Def tax assets/- liability 1,060 735 -224 -930 -1,757

Current assets 28,052 36,689 45,487 55,545 71,878

Inventories 6,696 8,155 8,534 9,601 10,847

Sundry debtors 9,206 13,896 12,800 13,966 15,778

Cash & bank balances 1,175 1,594 8,675 14,596 25,658

Other current assets 699 1,200 1,320 1,452 1,597

Loans & advances 10,277 11,845 14,158 15,930 17,997

Current liabilities & prov. 44,730 39,490 47,666 54,874 60,863

Current liabilities 28,787 31,494 29,385 32,846 36,499

Provisions and others 15,943 7,997 18,281 22,028 24,365

Net current assets -16,678 -2,801 -2,179 670 11,015

Others (net) 0 0 0 0 0

Application of funds 56,243 65,727 79,510 92,605 109,501


Cash flow statement (Rs mn)


Reported net profit 21,091 23,856 31,306 34,124 40,261

Depreciation and amort. 10,516 5,400 4,465 5,375 6,137

-Inc/dec in working cap. 1,289 -637 -1,391 1,227 594

Others 0 0 0 0 0

Cash from operations (a) 32,896 28,619 34,380 40,726 46,993

-Inc/dec in investments -4,649 9,347 -4,500 -4,500 -7,000

Capex -10,159 -10,678 -14,085 -11,827 -6,517

Others 1,593 -12,821 7,851 1,843 124

Cash flow from inv. (b) -13,216 -14,153 -10,733 -14,483 -13,393

Inc/-dec in capital 45 -422 0 0 0

Dividend+Tax thereon -15,199 -14,019 -17,524 -21,028 -23,365

Inc/-dec in loans -2,777 69 0 0 0

Others -2,384 324 959 706 827

Financial cash flow ( c ) -20,315 -14,048 -16,564 -20,322 -22,538

Inc/-dec in cash (a+b+c) -635 418 7,082 5,921 11,062

Opening cash balance 1,810 1,175 1,594 8,675 14,596

Closing cash balance 1,175 1,593 8,675 14,596 25,658


Key Ratios


BV/Share (Rs) 280.4 327.6 396.6 462.2 546.8

ROIC (%) 39.1 42.2 46.1 45.6 49.4

ROE (%) 39.8 41.9 43.3 39.8 40.0

Net Debt/equity ratio (x) -0.7 -0.5 -0.6 -0.6 -0.7

Valuation ratios (x)

PER 27.4 22.8 18.5 17.0 14.4

PBV 10.3 8.8 7.3 6.3 5.3

EV/EBITDA 15.8 16.5 12.4 11.2 9.2

EV/Sales 2.1 2.0 1.9 1.6 1.4

Turnover ratios (no.)

Debtor days 13 19 17 16 16

Inventory days 10 11 11 11 11

Creditor days 46 53 50 50 49




Appendix 1: Crop Economics

Exhibit 83. Per acre farm economics for Rice – Realization/Cost expected to improve in 2017

2011 2012 2013 2014 2015 2016 2017

Yield Quintal/Acre 13.5 14.5 14.9 14.6 14.1 13.8 14.2

Realization/Quintal 1,030 1,110 1,280 1,345 1,400 1,450 1,523

By-product 1,231 1,463 1,610 1,706 1,740 1,696 1,706

Total Realization 15,162 17,508 20,639 21,336 21,478 21,730 23,372

% YoY 5.6 15.5 17.9 3.4 0.7 1.2 7.6

Human Labour 3,081 3,296 3,629 4,190 4,641 5,116 5,373

Machine Labour 1,256 1,364 1,509 1,779 2,000 2,000 2,100

Animal Labour 649 840 833 896 943 991 1,040

Seeds 649 697 744 788 804 783 817

Fertilizers & manure 1,112 1,419 1,757 1,796 1,827 1,864 1,899

Pesticides & Insecticides 246 296 324 337 363 368 493

Water & Electricity 397 480 567 702 589 614 627

Working Capital 231 262 293 310 317 308 322

Miscellaneous 7 6 5 6 6 6 6

Total Cost 7,629 8,660 9,661 10,804 11,490 12,051 12,676

% YoY 11.0 13.5 11.6 11.8 6.3 4.9 5.2

Total Profit 7,533 8,848 10,978 10,532 9,989 9,679 10,696

Realization/Cost 1.99 2.02 2.14 1.97 1.87 1.80 1.84

Source: CMIE, Cost of Cultivation study, JM Financial, Farmer Interactions, Yield adjusted for Paddy instead of Rice with ratio of Rice/Paddy at 0.67, Relevant WPI indices used

Exhibit 84. Per acre farm economics for Wheat – Realization/Cost expected to improve in 2017

2011 2012 2013 2014 2015 2016 2017



By-product 2,958 3,341 3,683 3,902 3,982 3,343 3,400


% YoY 9.3 20.4 4.3 4.9 (1.0) (1.3) 8.9

Human Labour 986 1,155 1,242 1,413 1,548 1,689 1,773

Machine Labour 1,894 2,081 2,346 2,577 2,753 2,932 3,124

Animal Labour 234 167 195 178 168 158 149

Seeds 853 871 992 1,052 1,073 901 916



Water & Electricity 1,040 1,261 1,252 1,550 1,302 1,324 1,328

Working Capital 192 219 244 258 264 221 225


Total Cost 6,325 7,229 8,043 8,841 8,960 9,037 9,390

% YoY 7.8 14.3 11.3 9.9 1.3 0.9 3.9

Total Profit 10,178 12,634 12,666 12,882 12,556 12,194 13,732


Source: CMIE, Cost of Cultivation study, JM Financial, Relevant WPI indices used

Exhibit 85. Per acre farm economics for Onion – Profitable but volatile earnings

2011 2012 2013 2014 2015 2016 2017

Yield 57.5 65.2 64.7 65.2 65.3 65.3 65.3

Realization 1,623 1,068 1,314 2,727 1,914 2,561 2,561

By-product 447 490 470 480 467 467 467


% YoY 23.7 (25.3) 22.0 108.6 (29.7) 33.7 -

Human Labour 4,669 7,461 7,809 9,742 11,418 13,290 15,469

Machine Labour 1,177 1,721 1,496 2,073 2,628 3,298 4,139

Animal Labour 513 457 334 292 266 244 224

Seeds 5,365 3,530 2,554 2,707 2,762 2,692 2,806




Working Capital 500 557 550 582 594 579 604

Miscellaneous - 12 36 37 37 36 38

Total Cost 16,487 18,378 18,134 21,203 23,324 25,899 29,382

% YoY 49.2 11.5 (1.3) 16.9 10.0 11.0 13.4

Total Profit 77,317 51,718 67,378 157,189 102,067 141,719 138,237





Exhibit 86. Per acre farm economics for Potato – Profitable but volatile earnings

2011 2012 2013 2014 2015 2016 2017


Realization/Quintal 845 788 1,298 1,392 1,876 1,035 1,035

By-product - - - - - - -


% YoY (12.5) (10.7) 72.4 (0.8) 48.0 (44.9) -

Human Labour 3,306 3,240 3,709 3,997 4,213 4,430 4,658

Machine Labour 1,186 1,753 1,715 1,960 2,154 2,358 2,581

Animal Labour 403 418 470 462 456 450 445

Seeds 7,793 6,540 9,107 9,650 9,846 9,596 10,003




Working Capital 542 558 694 736 750 731 762

Miscellaneous 0 1 96 98 100 97 102

Total Cost 17,876 18,411 22,907 24,503 24,942 25,270 26,416

% YoY (15.8) 3.0 24.4 7.0 1.8 1.3 4.5

Total Profit 59,821 50,949 96,665 94,156 150,641 71,561 70,415



Exhibit 87. Per acre farm economics for Arhar (Kharif) – Government focus to increase pulse acreage through higher

MSP increases

2011 2012 2013 2014 2015 2016 2017



By-product 624 922 937 993 1,013 987 1,029


% YoY 16.8 10.7 37.2 16.1 (3.5) 0.8 19.9

Human Labour 2,360 2,224 2,665 3,212 3,730 4,164 4,514

Machine Labour 832 881 1,212 1,586 1,904 2,172 2,493

Animal Labour 1,084 1,184 1,303 1,364 1,397 1,441 1,501

Seeds 427 422 494 524 534 521 543

Fertilizers & manure 871 688 1,131 1,156 1,175 1,200 1,222

Pesticides & Insecticides 549 563 810 841 906 919 1,230

Water & Electricity 75 130 134 166 139 145 148

Working Capital 194 191 242 257 262 255 266


Total Cost 6,394 6,290 7,996 9,110 10,052 10,820 11,920

% YoY 20.5 (1.6) 27.1 13.9 10.3 7.6 10.2

Total Profit 2,185 3,209 5,039 6,029 4,556 3,898 5,724





Appendix 2: 2nd advanced estimate for Rabi 2016

production

2nd

Estimate released by Government in Feb 2016 under threat of downward revision

due to unseasonal rains

It is to be noted that Government’s second estimate of production (released in

Feb 2016) has forecast 4% higher cereal production led by 8.4% increase in wheat

output, while Rice and Coarse cereals are expected to decline YoY. Among other

key crops, pulses are expected to be flat.

Exhibit 88. Government’s advanced estimates for Rabi 2016 point to higher cereals and stable pulse output

Cereals – Expected to be higher output due to healthy wheat

production

Pulses output to stabilize in 2016, post decline in 2015

Source: CMIE, 2nd advanced estimates released in Feb 2016

Exhibit 89. Coarse cereals – Output to decline sharply in 2016 on account of

lower Maize production

Source: CMIE, 2nd advanced estimates released in Feb 2016

-8.6%-9.7%

-7.0%

-1.4%

3.9%

8.4%

-7.6%

-15.2%

-20%

-15%

-10%

-5%

0%

5%

10%

Cereals Wheat Rice Coarse cereals - Total

2014-15 - YoY (%) 2015-16 Forecast - YoY (%)

-10.1%

-23.1%

23.7%

-1.3%

0.4%

10.4%

-5.9%-7.8%

-30%

-20%

-10%

0%

10%

20%

30%

Pulses Gram (Pulses) Black gram (urad)(Pulses)

Green gram (Moong)(Pulses)

2014-15 - YoY (%) 2015-16 Forecast - YoY (%)

-1.4%

0.0% 0.6%

-12.1%

-15.2%

-5.1%

-24.4%

6.2%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

Coarse cereals - Total Jowar Maize Barley

2014-15 - YoY (%) 2015-16 Forecast - YoY (%)



Appendix 3: Rural Consumption

Exhibit 90. Rural MPCE (Rs) per fractile class (2012)

Spend by category 0-5 5-10 10-20 20-30 30-40 40-50 50-60 60-70 70-80 80-90 90-95 95-100 Overall

Cereals and pulses 125 148 163 173 182 187 196 203 215 231 241 293 195

Oils and Spices 51 61 71 80 88 96 105 113 123 135 148 191 104

Sugar & Salt 12 15 17 20 21 24 26 28 31 36 40 52 26

Vegetables 52 64 71 79 83 88 93 100 109 119 132 162 95

Milk+ 18 32 49 58 75 91 103 124 148 192 239 332 115

Meat+ 14 22 30 42 49 55 68 74 84 102 123 201 68

Fruits 5 7 12 17 22 28 33 41 54 70 96 150 41

Beverages 40 52 60 68 79 90 97 112 129 156 197 388 113

Food (total) 316 401 472 535 599 659 722 795 891 1,040 1,217 1,770 756

Non-Food expenses

Fuel 65 76 83 92 97 104 111 120 130 148 169 203 114

Clothing & Footwear 44 55 62 70 78 87 97 105 117 138 167 233 100

Medical 16 25 31 43 47 56 68 78 106 144 221 494 95

Education 8 11 15 20 22 28 31 41 54 79 121 278 50

Household consumables+ 24 30 35 41 45 52 58 66 76 89 111 154 62

Consumer services+ 23 32 42 52 64 77 90 114 137 189 266 492 117

Rent & taxes 0 1 1 2 3 3 5 7 9 14 30 81 10

Entertainment 2 3 4 5 8 10 13 15 19 25 33 50 14

Tobacco+ 15 20 23 27 33 35 40 49 55 67 81 140 46

Consumer durables 9 13 14 17 22 25 31 37 51 75 140 586 65

Total non-food 206 265 311 369 419 477 544 632 754 968 1,340 2,711 673

Total spend 521 666 783 905 1,018 1,136 1,266 1,427 1,645 2,007 2,556 4,481 1,430

Source: NSSO, 70th

Round

Exhibit 91. Share of MPCE by category – Rural India

Rural 0-5 5-10 10-20 20-30 30-40 40-50 50-60 60-70 70-80 80-90 90-95 95-100 Overall

Cereals and pulses 24.0% 22.2% 20.8% 19.1% 17.9% 16.5% 15.5% 14.2% 13.1% 11.5% 9.4% 6.5% 13.7%

Oils and Spices 9.7% 9.2% 9.0% 8.8% 8.6% 8.4% 8.3% 8.0% 7.5% 6.7% 5.8% 4.3% 7.2%

Sugar & Salt 2.2% 2.3% 2.2% 2.2% 2.1% 2.1% 2.0% 1.9% 1.9% 1.8% 1.6% 1.2% 1.8%

Vegetables 10.0% 9.6% 9.1% 8.7% 8.1% 7.8% 7.3% 7.0% 6.6% 5.9% 5.2% 3.6% 6.6%

Milk+ 3.4% 4.8% 6.2% 6.4% 7.4% 8.0% 8.1% 8.7% 9.0% 9.5% 9.3% 7.4% 8.0%

Meat+ 2.7% 3.3% 3.9% 4.6% 4.9% 4.8% 5.4% 5.2% 5.1% 5.1% 4.8% 4.5% 4.8%

Fruits 0.9% 1.1% 1.5% 1.8% 2.1% 2.4% 2.6% 2.9% 3.3% 3.5% 3.8% 3.3% 2.8%

Beverages 7.7% 7.8% 7.6% 7.5% 7.8% 8.0% 7.7% 7.9% 7.8% 7.8% 7.7% 8.7% 7.9%

Food (total) 60.6% 60.2% 60.3% 59.2% 58.9% 58.0% 57.0% 55.7% 54.2% 51.8% 47.6% 39.5% 52.9%

Fuel 12.4% 11.4% 10.6% 10.2% 9.5% 9.1% 8.8% 8.4% 7.9% 7.4% 6.6% 4.5% 8.0%

Clothing & Footwear 8.4% 8.2% 7.9% 7.8% 7.6% 7.7% 7.7% 7.3% 7.1% 6.9% 6.5% 5.2% 7.0%

Medical 3.1% 3.8% 4.0% 4.7% 4.7% 4.9% 5.4% 5.5% 6.4% 7.2% 8.7% 11.0% 6.7%

Education 1.4% 1.6% 1.9% 2.2% 2.2% 2.5% 2.5% 2.9% 3.3% 3.9% 4.8% 6.2% 3.5%

Household consumables+ 4.6% 4.5% 4.5% 4.5% 4.4% 4.5% 4.6% 4.6% 4.6% 4.4% 4.3% 3.4% 4.3%

Consumer services+ 4.5% 4.8% 5.3% 5.8% 6.3% 6.8% 7.1% 8.0% 8.3% 9.4% 10.4% 11.0% 8.2%

Rent & taxes 0.1% 0.1% 0.1% 0.2% 0.3% 0.3% 0.4% 0.5% 0.6% 0.7% 1.2% 1.8% 0.7%

Entertainment 0.3% 0.4% 0.5% 0.6% 0.7% 0.8% 1.0% 1.1% 1.1% 1.2% 1.3% 1.1% 1.0%

Tobacco+ 2.9% 3.1% 3.0% 3.0% 3.3% 3.1% 3.2% 3.4% 3.4% 3.3% 3.2% 3.1% 3.2%

Consumer durables 1.7% 1.9% 1.8% 1.9% 2.1% 2.2% 2.4% 2.6% 3.1% 3.7% 5.5% 13.1% 4.5%

Total non-food 39.4% 39.8% 39.7% 40.8% 41.1% 42.0% 43.0% 44.3% 45.8% 48.2% 52.4% 60.5% 47.1%

Source: NSSO, 70th

Round



Appendix 4: Global agri-commodity price trend

Exhibit 92. Agri Commodity prices have remained weak, expected to rise as La Nina impact sets in

Global commodity prices have remained largely in a narrow

band over the past few years (excluding Copra) Cotton and wheat prices have declined in last one year

Source: Bloomberg

25

75

125

175

225

275

325

Sugar Wheat Cotton Coffee Tea Copra Palm Oil

-12.3%

9.2%

-7.8%

-12.9%

-1.1%

27.2%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Cotton Sugar Corn Wheat Coffee Palm Oil

(%)



Notes



APPENDIX I


(Formerly known as JM Financial Institutional Securities Private Limited)

Corporate Identity Number: U65192MH1995PLC092522

Member of BSE Ltd. and National Stock Exchange of India Ltd. and Metropolitan Stock Exchange of India Ltd.

SEBI Registration Nos.: BSE - INZ010012532, NSE - INZ230012536 and MSEI - INZ260012539, Research Analyst – INH000000610

Registered Office: 7th Floor, Cnergy, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400 025, India.

Board: +9122 6630 3030 | Fax: +91 22 6630 3488 | Email: [email protected] | www.jmfl.com

Compliance Officer: Mr. Sunny Shah | Tel: +91 22 6630 3383 | Email: [email protected]

Definition of ratings

Rating Meaning

Buy Total expected returns of more than 15%. Total expected return includes dividend yields.

Hold Price expected to move in the range of 10% downside to 15% upside from the current market price.

Sell Price expected to move downwards by more than 10%

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The Research Analyst(s), with respect to each issuer and its securities covered by them in this research report, certify that:

All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their

securities; and

No part of his or her or their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed

in this research report.

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information about the company(ies) and sector(s), if any, covered in the report and may be distributed by it and/or its associates solely for the

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