Published in July 2014

Size USD 425 billion

Companies from diverse sectors are finding new growth areas in rural India

Per capita consumption greater than urban markets

Nielsen India puts the rural consumption growth at 18.7% annually in 2013

RBI says average nominal rural wage has increased by 17% from

2008 to 2013

NREGA has shored up disposable incomes in agri-based non-urban India translating into more non-food spend

While growth of Indian metropolitan urban

consumption is 10.8%

TelecomAgricultural Service &

Product ProvidersVehicle

Manufacturing

Financial ServicesFMCGConsumer Durables

• Companies that have been able to take advantage of increasingrural prosperity are companies which have strong rural-centricmoats

• A moat in the form of a well-established system of distributionchannels, or catering to a uniquely rural market requirement,gives companies the scale benefit.

• Consumer goods companies, agricultural suppliers and vehiclemanufacturers, who have had this advantage over theircompetitors, are in a better market position.

High quality companies with a strong rural ‘moat’ have been able toderive significant benefit to their businesses by leveraging theirfamiliarity with this market.

Vast service network in rural and semi-urban

markets

Rural sales share grew to 30% in

2014E from 3% in 2008.

18% increase in sales from rural markets (April-

November 2013)

Operates 700 rural outlets

Has offset the overall industry

trend of declining sales for 2013-14

Note: The mention of the above company serves as an example of ‘The Rural Story of Moats and Fundamentals’. This does not indicate any investment proposition in the company.

• Considering a strong moat can help companies chart success in ruralmarkets, companies with shaky fundamentals have not been able tosustain their rural market story.

• For example, in sectors that cater to the booming agriculture-basedeconomy, a company with better fundamentals should have adramatically different growth story than a company with a similar moatbut one which is also facing corporate governance issues.

• A good comparative study is of German company which sells productsfor crop protection, and an Indian company which manufacturesirrigation systems. Both companies cater to the highly lucrative agri-input sector.

• The historical fundamentals of thesetwo companies show a contrast inunderlying business management andprofitability.

• Although the Indian company was amarket favorite till half a decade ago, ithas had issues with bad assetallocation and high debt in the pastfew years, which reflect badly in thereturn ratios.

The Indian company is leveraged, while theGerman company has net cash on balance sheet(i.e. no balance sheet risk).

German firm has enjoyed a much higher returnon equity (ROE) and return on capital employed(ROCE) as compared to the Indian company.

Indian company has significant negative free cashflow (FCF) generation, the German one has apositive FCF.

The German company has been able to leveragethe rural moat due to its strong fundamentals.

One can also see the difference in the way theprice of these companies have compounded overa period of time.

The Indian company, a front runner in the micro-irrigation field, still has to recover fromdiversifications gone bad.

• While the rural theme is significant as an opportunity forimproving performance, a company’s fundamentals arewhat eventually play an important role in making it a highquality stock.

• From the perspective of an investor the inherent quality ofthe company or the business is more important than thelarger theme (i.e. access to the rural markets or having arural moat). Investing in a high-quality business reducesthe odds of losing money even if the “theme” does not playout.

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