Rural consumption to triple to $600 bn in 3 years: Nischal Maheshwari, Head-Research, Edelweiss

Edelweiss has gone out towards the whole of India. They have sampled some 2000 rural households. It was a question that they have designed to figure out -- Where exactly would rural income go through if indeed it were to rise? ET Now caught up with Nischal Maheshwari, Head of Research, Edelweiss, for his views on this survey.

What inferences or new discoveries have you made as the result of this exhaustive survey?

There are two differences I would like to highlight what people have done earlier basically and what we have gone out doing. One is the scope of the study itself. We discovered 5 states, 15 districts and 2000 villages. If we put that on a bell curve, actually there are 1983 households which we covered. This almost gives you around 95% results which are most likely to be right.

So that is why we covered a much larger portion basically and the purpose of this was two-fold. One was during the last drought when everybody expected that the consumption in the country is going to drop and GDP growth may fall below 6%, it was the rural side and the rural market basically which supported the market very well. Our purpose was basically to find out whether this consumption being largely driven by government handouts in terms of whether it was MSPs or NREGA schemes or is there a fundamental structural change which is happening on the ground out there.

To my surprise - and it is a happy coincidence - we found out that there is structural change which has happened on the rural income side. So no more things are as dependent on the rainfall as it was may be 5-10 years back. One or two instances I would like to highlight is that today around 42% of the people are only dependent on farm income where the primary source of income is only farm. Earlier it used to be around 63%. So people have actually gone out and found may be other jobs. The variable which has improved is the salary of the labour class basically mostly supported by NREGA and the Bharat Nirman. So we see construction all over the country and that is what is driving the rural income actually.

The third thing I would like to highlight is the socio-economic changes which are happening on the rural front. So you are disguised in unemployment which used to be there. There was somebody basically who did not find employment and he used to go back and just start tilling his land along with his brothers or father. Now that guy has actually started finding employment in the country and I think that is very good because the rural income has gone up - grown in the last 5 years by around 8% per household on a CAGR basis and is now Rs 76000 per household.

What is the derivation of this whole study? What are the spaces, if indeed the rural income has increased? What will actually benefit as a result of that, what pocket?

Consumption is one big pocket basically which is going to improve substantially. Right now rural consumption is around $190 billion. If you look at the total urban population, it consumes around $600 billion right now of the total. So your GDP is around 1.2 trillion and out of that, 66% is consumption and out of that $200 billion is rural and $600 billion is urban.

Our call is that given that the rural incomes are pretty strong, the rural consumption in the last 5 years has grown by around 6-7%. That is going to accelerate and grow by around 9-10% in the next 10 years. This rural consumption - which is around $200 billion - is going to triple from here in the next 3 years to $600 billion – the total consumption of the urban sector today.

What spaces in the listed space would benefit?

We should go back and look at what has driven the urban consumption and what has been the sector which has benefited out of that. You have been selling around 1.2 million cars in the country right now and a majority of them gets sold on the urban side. If your consumption basically goes out from $200 billion to $600 billion, you can sell maybe up to 1 million cars in the rural market itself. So your car market is going to explode.

Similarly, the other surprising factor has been the dish connections. Today incremental all dish connections - basically 70% of them - are sold in the rural markets and that is because of non availability of electricity and all. That is going to grow tremendously. The regular stuff, FMCG products and all, obviously people are going to take up but the major growths are going to come in autos and the non-durable consumption goods basically. So fridges, TVs are going to be growing big time.

What would you bet on then? You mentioned that how disconnections are increasing, I am guessing a direct beneficiary would be companies like Dish TV, etc. Would that be something that you would bet on?

Definitely.

You mentioned about consumer durables. So Whirlpool and the other non-listed spaces as well. Are these pockets, which have not been talked about too much of late, the ones that you would bet on for the next 2-3 years?

Yes, definitely next 2-3 years, but even bet on them for a long term, five-year plan basically. So right now we keep on getting worried about that the FMCG sector is at 30 times, 35 times. Should we be investing in it? I am saying that the rural is going to surprise all of us basically on the consumption side. You may see that these stocks will keep on delivering much better numbers than the market is expecting and may not be as costly as what we are looking at it.

Are the microfinance companies something that you would look at as well?

Definitely, but I would like to highlight one more point on the finance side. The rural savings have grown and earlier what used to be around 21-22% of the households which used to be saving some money, today it is now almost around 58% of the households which save.

Unfortunately, access to banking as yet is only 65% but still around 50% of the people keep their money in cash form because access to banking, though they have a bank account, is not very good. So the financial inclusion, which the government has been talking about, and the new bank licenses and all come through basically and are pushed to open up in the rural side, those will be the major beneficiaries. Microfinance companies have done a wonderful job out there. They will continue to benefit quite a bit.
Education is the third one that you have highlighted. Would these mean the normal names that come to mind, the likes of an Educomp, Everonn and Core Projects or are there some niche plays? Even within the other spaces that you have highlighted, are there any niche pockets that you found out, listed stocks, which have probably not been talked about?

On the education front, none of the listed guys do much on the rural side. But one thing, which came out very strongly, was that the rural people basically are looking at education as the form of deliverance. Basically they believe - and very strongly believe - that it is education which is going to bring them out of poverty and not any other thing.

So the incremental stuff which is happening is after the savings which they are putting, they are saying after healthcare, the next biggest spend which they want to do is on education of their children. So the scope is huge on the education front if people are able to exploit it. But I do not see any of the listed side guys basically looking at the rural markets for the moment.