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Strategy | I N D I A

NOMURA FINANCIAL ADVISORY AND


SECURITIES (INDIA) PRIVATE LIMITED
Prabhat Awasthi +91 22 4037 4180 prabhat.awasthi@nomura.com
TOP
Nipun Prem +91 22 4037 5030 nipun.prem@nomura.com DOWN

 Action Stocks for action


The rural bandwagon continues to roll. Supportive government policies, greatly Except FMCG, telecom and few auto
improved farm economics, improved availability of financing and benevolent wealth companies, the focus of corporate
effects of sharp land price appreciation are driving significant changes in rural India has only recently shifted to the
consumption habits and lifestyle. We remain bullish on the rural consumption story. rural story. We recommend that
investors buy mechanisation, low-
Anchor themes penetration and aspirational stocks.
The rural story conforms to our bullish view on domestic consumption. It is also, in Price
part, responsible for elevated aggregate demand, which in a supply-constrained Price target
Stock Rating (INR) (INR)
economy is causing high inflation; a key reason for our cautious stance on the Mahindra & Mahindra (MM IN) BUY 788.2 892
market, in addition to slowing growth momentum and a sluggish investment cycle. Baja Auto (BJAUT IN) BUY 1307.4 1810
ITC (ITC IN) BUY 169.1 200
How to play the rural theme? Buy mechanisation, buy low penetration and buy Dish TV (DITV IN)* BUY 62.5 64

aspiration. The following stocks screen well on these criteria — Mahindra, Bajaj Jain Irrigation (JI IN) BUY 225.9 261

Auto, ITC, Dish TV, and Jain Irrigation. * Price target under review

The rural juggernaut rolls on Analysts


Prabhat Awasthi
 Straight from the heartland +91 22 4037 4180
prabhat.awasthi@nomura.com
Seven analysts from our research team travelled to rural regions across the
country to better understand the rural story. They spoke to farmers, shop keepers, Nipun Prem
auto dealers, farm labourers and general rural folk. What follows are key +91 22 4037 5030
takeaways from the sampled regions. We have tried to be as true as we could to nipun.prem@nomura.com
the sentiment expressed by those we interviewed and have not tried to overlay
them with our personal views or couch them in economic statistics. Kapil Singh
+91 22 4037 4199
kapil.singh@nomura.com
 The rural economy — rising incomes, growing consumerism
Rural India is reaping the benefits of supportive government policies and Aatash Shah
favourable farm economics. Crop prices have multiplied and benevolent wealth +91 22 4037 4194
effects of sharply rising land prices are underpinning rural incomes and propensity aatash.shah@nomura.com
to consume. Positive spill-over effects of strong economy-wide growth are
providing more opportunities to trade. Higher incomes are providing the seed Anup Sudhendranath
+91 22 4037 5406
capital to diversify into ancillary farming and other non-farm sources of income.
anup.sudhendranath@nomura.com
With income and wealth effects both in the bag, rural consumption is on a roll. We
reckon that rural consumption is still in early stages of its evolution. Even as Pinku Pappan
+91 22 4037 4360
incomes have increased dramatically, the propensity to spend will change only
pinku.pappan@nomura.com
slowly as the multiplier works its way over time.
Harish Venkateswaran
 Buy mechanisation, low-penetration and aspiration +91 22 4037 4028
The rural story is not easy to play. Rural India thus far has had only a marginal harish.venkateswaran@nomura.com
share in the consumption of higher-end goods. Except for FMCG, telecom and a
few auto companies, the focus of corporate India has only recently shifted to the
rural story. Dearer and scarcer farm labour should lead to increasing substitution of
man with machine. Rising consumerism is fast underpinning rural consumption.

 Top rural plays


We recommend the following stocks in our coverage universe as top rural plays —
Mahindra & Mahindra, Bajaj Auto, Dish TV, ITC and Jain Irrigation.

Any authors named on this report are research analysts unless otherwise indicated.
See the important disclosures and analyst certifications on pages 27 to 31.

Nomura 1 27 January 2011


Strategy | India Prabhat Awasthi

Contents

The rural story continues to unfold 3


Incomes have multiplied, consumerism is fast catching on 3
How to play the rural theme? Buy mechanisation, buy low-penetration and buy
aspiration 4
Top rural plays 5

The rural juggernaut 7


I. The regions visited: An overview 7
II. Farming economics 10
III. Impact of government schemes 15
IV. Availability of finance 17
V. Change in consumption habits 20
VI. Impact of information 23
VII. Other feedback from conversations with farmers 24
Valuation methodology and investment risks 26

Nomura 2 27 January 2011


Strategy | India Prabhat Awasthi

Conclusions & stock picks

The rural story continues to unfold


The rural bandwagon continues to roll: The great Indian rural story is on a roll. It is Countryside starting to
not new and has been much talked about. We think it has much longer to go. We participate in the economic boom
believe that the structural changes brought about in India’s rural economy are massive
and have significant investment implications.

A first-hand glimpse: The purpose of this report is not to contextualise the rural This is boots-on-the-ground
growth story in a macroeconomic framework. It has been done before, and often. analysis …
Rather, we wanted to get a first-hand sense of the forces of growth chiselling away at
the economic landscape in rural India and shaping the future trajectory of growth for
the wider economy.

Seven analysts from our research team travelled to rural regions across the country to … anecdotal — but people count
better understand the rural story. They spoke to farmers, shop keepers, auto dealers, as much as statistics
farm labourers and general rural folk. What follows are key takeaways from the
sampled regions. We have tried to be as true as we could to the sentiment expressed
by the people we interviewed and have not tried to overlay them with our personal
views or couch them in economic statistics.

Incomes have multiplied, consumerism is fast catching on


Universal rise in incomes: The over-arching feedback from our field trips was the Rising rural incomes the key
impressive rise in rural incomes across the country. Incomes have risen anywhere theme
between 2-4x times (even higher in some cases) over the past four years. Several
factors are at play here.

1. Higher crop prices: Crop prices are up on account of government-administered


minimum support prices, rising prices of cash crops and export items (such as
grapes) and ever rising demand for food in a high-growth economy. While input
costs have also risen, the increase in incomes has been much stronger.

2. Government schemes: Government schemes have affected rural incomes in two


ways. First, the national rural employment guarantee (NREGA) scheme has
increased the bargaining power of marginal farmers and landless labourers
leading to a surge in wages and a shortage of rural labour in general. Second, the
general push by the government in rural infrastructure has resulted in better roads,
wider connectivity and greater availability of electricity. We note that the primary
driver of rural prosperity is increasing farm product prices, and NREGA and
government spending have been icing on the cake.

3. Availability of financing: Availability of financing has improved, partly because of


the push by the government and partly because of better penetration of banks and
other rural financing companies. Competition among NBFCs is heating up and
lending terms and conditions have become easier for farmers.

4. Wealth effect from rising land prices: As owners of a highly inelastic factor of Farmers like real wealth — land
production like land, farmers have benefited immensely from benevolent wealth and gold
effects of sharp recent increases in land prices across the country. Land (and
gold) is the preferred instrument of savings for most in rural India. Land prices get
a further leg up as farmers plough their savings back into land. Also, the inflow of
remittances from Indians living abroad is chasing land prices higher, especially in
Punjab and southern states of the country.

5. Spill-over effects of nationwide economic growth: Positive externalities from


years of strong nation-wide growth are paying off for rural India. Better and more
roads have increased trade with neighbouring villages, cities and states. Widening
reach of media, cable TV and mobile phones has spurred aspirational demand
and consumerism while mitigating business risk through timely dissemination of
information (about crop prices and weather patterns, for example). Broad

Nomura 3 27 January 2011


Strategy | India Prabhat Awasthi

economic growth in the country and rising aggregate demand are providing fast-
expanding markets for food products and putting upward pressure on farm output
prices. Improving terms of trade for farmers imply rising incomes and consumption.

6. Farmers turning into entrepreneurs: Higher economic activity on an overall Rising incomes provide more
basis, rising incomes and benevolent wealth effects from the manifold increase in opportunities
land prices are providing seed capital to supplement farm incomes and diversify
into ancillary activities like dairy, retail, infrastructure (supplying sand, for example)
and transportation (renting tippers and tractors, for example). Rising incomes
mean that consumption in rural India is moving up the value chain, providing fresh
opportunities for new business expansion (eg, retailing).

7. Susceptibility to droughts is falling: The other important takeaway from our


rural trips is that monsoons are no longer a key driving force as farmers, in general,
are significantly wealthier and their wealth in land significantly higher. Moreover,
the shortage of labour created by government policies and a general tilting of
terms of trade in the favour of the rural economy means that both landless
labourers and land-owning farmers are less susceptible to the risk of a monsoon
failures. We also note that non-agricultural activities are rising in rural areas and
this is reducing the level of dependence on pure agriculture as the predominant
source of income.

How to play the rural theme? Buy mechanisation, buy low-


penetration and buy aspiration
We think that the following are the key ways to benefit from rising rural affluence:
1. Buy mechanisation

A common theme that emerged across the regions we visited was the strength of Richer farmers can invest in
wages paid to daily farm labourers. Rising costs of living and labour shortages better equipment — tractor
have been mainly responsible for the sharp appreciation of the price of farm labour. makers look good here
We think that this combination of dearer and scarcer farm labour will lead to
increasing substitution of man with machine and mechanisation will continue to
rise at a quick pace in rural areas. Moreover, rising farming income and
supplemental income from non-farming ancillary activities have imparted farmers
with the ability to invest in the mechanisation of their farms. Consistent feedback
from tractor dealers was that there has been a significant rise in cash sales over
the past one year.

2. Buy low penetration


For all the progress and increase in wealth and incomes in the past few years, The countryside is also a wide-
rural India still remains vastly underpenetrated. Rural India thus far has had only a open market
marginal share in the consumption of higher-end goods. Except for FMCG,
telecom and a few auto companies, the focus of corporate India has only recently
shifted to the rural story.

3. Buy aspiration

Barring regional differences in tastes, preferences, and consumption habits, we And very broadly, a whole class
found the following common threads that ran across the regions we visited: 1) an of consumers is being created
increasing willingness to experiment and explore new products; 2) need to keep
up appearances and purchase goods thought of as status symbols; 3) rising
consumerism and purchase of consumer durables; 4) amenability to up-trade, and;
5) rising brand awareness.

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Strategy | India Prabhat Awasthi

Top rural plays


1. Mahindra & Mahindra (MM IN, BUY, CP INR788.2, PT INR892, Kapil Singh)
Tractors key beneficiaries of increased mechanization…: Mahindra & Labour shortage also favours
Mahindra’s tractor segment will be a key beneficiary of the labour shortages being machines
created by the NREGA scheme, in our view. With nearly 40mn households being
employed under the NREGA scheme, there is a shortage of rural labour being
created.

…and higher labour costs: In addition, the government also plans to increase
rural wages by 25% this year. This will lead to a sharp increase in cost of rural
labour, leading to further mechanisation at farms.

Increasing non-farm usage of tractors: The rural development policies are also
leading to alternative use of tractors in non farming activities. This is leading to
increased viability of smaller farmers owing a tractor. The company is the leading
tractor player in India with 40% market share in the tractor market and will be a big
beneficiary from this, in our view. We value the company at INR 892/share based
on Sum-of-the-Parts methodology.

2. Bajaj Auto (BJAUT IN, BUY, CP INR1307.4, PT INR1810, Kapil Singh)


Strong two-wheeler play: Bajaj Auto is the second-largest two wheeler company
in India with 27% domestic market share. The company has had an urban-focused
portfolio with 50% market share in the premium segment but only 20% in the
executive segment which forms 65% of the market.
Increasing rural focus: The company is now targeting increasing dealerships by
25% to increase focus on the rural segment. They are also looking to have more
products focused on the rural market. We are building in 15% growth in Bajaj
Auto’s volumes in FY12F. We value the company at INR1,810, based on DCF-
methodology.

3. ITC (ITC IN, BUY, CP INR169.1, PT INR200, Manish Jain / Anup


Sudhendranath)
Top pick in FMCG space: In line with our broad theme of having a positive bias
on aspiration and low-penetration ideas across rural India, we have ITC as one of
the top picks in the FMCG space.

Up-trading to cigarettes: We believe that with farm incomes rising, rural Cigarettes an affordable luxury;
consumers getting more affluent, and aspiration levels rising, one of the key this is an ‘aspirational’ good
beneficiaries would be ITC’s cigarette business. Remember, a large section of
consumers still smoke local hand-rolled ‘bidis’ and we see this section of
consumers increasingly moving away from bidis to cigarettes over the medium- to
longer-term. ITC would be a key beneficiary of consumer up-trading in cigarettes.

Foods business under-penetrated: ITC’s foray into other FMCG businesses


should also benefit from improving macro trends across rural India. Segments
such as biscuits, salted snacks and the like are still largely under-penetrated and
with the company offering these at price points which vastly improve affordability
for the rural consumer, the food segment could also see strong traction over the
short-to medium-term.

4. Dish TV (DITV IN, BUY, CP INR62.5, PT INR64, Jamil Ansari)


Biggest DTH player: Dish TV is the largest direct-to-home (DTH) player in India
currently, with 9.4mn subscribers in the country’s 30mn strong DTH market. We
believe growth in the DTH platform will continue unabated for the next few years
and might actually accelerate in the medium-term, eventually making DTH the
most dominant distribution system in the Indian television market.

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Strategy | India Prabhat Awasthi

Upside to rural subscriber base: In our opinion, the DTH subscriber base can
potentially double in the next three years with bulk of the new subscribers coming
from the rural / semi-urban regions. Currently almost 45% of Dish TV's subscriber
base comes from rural India and this number can potentially go up to 60% in the
next three years. As the first player in this industry, we believe Dish TV is best-
placed to capitalise on the industry’s potential high-growth outlook. We have a
BUY rating on the stock with a DCF-based PT of INR64.

5. Jain Irrigation (JI IN, BUY, CP INR225.9, TP INR261, Aatash Shah)


Increased policy focus on micro irrigation: With current high food inflation in
India, the government will have to urgently look for solutions to increase farm
yields while conserving water. Implementation of micro irrigation systems can help
do this very effectively. We believe that there will be increased focus by the central
government on micro-irrigation. As part of the national mission status for micro
irrigation there already exists a significantly higher spending outlay on micro
irrigation, expansion of the subsidy beyond horticulture and better systems to
ensure quicker subsidy disbursements.

We think that the growth rate of the company’s MIS business can exceed 30%
over the next four to five years, much longer than earlier envisaged. With the
establishment of state level bodies over the next year to allocate central
government funds rather than the current district level model, the subsidy
disbursements should be faster and help reduce working capital requirements for
Jain and improve cashflows.

Rising mechanisation: With increasing shortage of labour, farmers will have to Mechanisation pays for itself
look towards mechanising their irrigation practices with MIS as the best alternative quite quickly
available, in our view. The constraint in terms of high capital cost will get eased
out as farmers’ incomes are increasing substantially while subsidies in the range
of 50-70% are available from the government. In our estimate, MIS systems have
a payback period of one-two years through increased yields, water and power
saving and hence are a very cost effective investment.
Re-rating potential: We believe that the earnings CAGR of Jain irrigation will be
40% between FY11-13F and ROEs will improve from 20.5% in FY11F to 25.3% in
FY12F (provided there is no equity raising). In such a situation, we believe, the
earnings multiple for the stock can re-rate. Since April 2006, the stock has traded
at an average multiple of 22x one year rolling forward earnings. We apply a
multiple of 20x to our one-year rolling forward EPS to arrive at our 12-month price
target of INR261/share.

Nomura 6 27 January 2011


Strategy | India Prabhat Awasthi

Drilling down

The rural juggernaut


I. The regions visited: An overview
Seven analysts from our research team travelled to rural regions across the country to Our analysts have not been
better understand the rural story. They spoke to farmers, shop keepers, dealers, farm content to merely parse data
labourers and general rural folk. What follows are key takeaways from the sampled
regions.

Exhibit 1. Rural regions visited by our analysts

Amritsar,
Punjab
(Nipun Prem)

Rai Bareilly/Barabanki, UP
(Kapil Singh)

Barasat, West
Bengal
Navsari, Gujarat (Anup
(Aatash Shah) Sudhendranath)

Nasik, Maharashtra
(Prabhat Awasthi)

Maddur, Karnataka
(Anup Sudhendranath)

Cochin, Kerala
(Pinku Pappan)
Nagercoil, Kerala
(Harish Venkateswaran)
Source: Nomura research

1. Amritsar, Punjab, Northern India (Nipun Prem)


Punjab is a key agricultural state of India and led the Green Revolution in the Farmers have been able to
country in the 1960s. Paddy is the main summer crop and wheat is the main diversify income
winter crop in the region visited. Farmers augment their incomes following the
paddy harvest by planting vegetables with short two-month life-cycles such as
peas, radish, cauliflower and carrots. Even though Punjab is better irrigated
compared to other states in India, tube-wells are an important source of water for
most farmers. Average land holdings in the region are about 5-7 acres, though
much higher for richer farmers. Farmers have benefited from higher economic
activity and growth which have provided them with opportunities to supplement
their incomes with ancillary activities like dairy, supplying sand (spot selling of
sand is used in construction, which has seen significant growth in rural areas) and
transportation.

Another important factor driving the rural theme in the region is the wealth effect
from rising land prices and remittances from abroad. Agricultural surpluses have

Nomura 7 27 January 2011


Strategy | India Prabhat Awasthi

also been used to consolidate land holdings rather that being invested in other
investment avenues like equities. Bank deposits are mainly used for working
capital needs. Status is a function of size of land holdings.

2. Rai Bareilly and Barabanki, Uttar Pradesh, North central India (Kapil
Singh)
The principal crops in the area are rice, wheat, pulses and cash crops like Rising MSPs, greater availability
sugarcane, vegetables and Eucalyptus. Over the past few years farmers have of finance and improved
reaped rich dividends from increased minimum support prices (MSPs) for crops. infrastructure and information
They have also benefited from improved road connectivity to Lucknow city, which
has led to sharp appreciation in land prices. With incomes growing from farming
as well as non-farming activities, the people we met indicated to prospects of
another prosperous year.

3. Barasat and Kolkata, West Bengal, Eastern India (Anup Sudhendranath)


Paddy, vegetables, jute and potato are the main crops grown close to the area.
Typically farmers are able to grow paddy crops twice a year and use some part of
the land to grow vegetables. Other crops in the area include jute and potatoes.
Land is fertile and crop has been good for the most part of the last three years.

Use of farm equipment seems limited, as paddy crop has traditionally relied on
rain water. As far as sprinklers are concerned, most farmers seemed to be using
equipment from local manufacturers. Average size of land holding is about three-
four acres in the area. There are only a few farmers who own eight-10 acres or
more, and they are leasing out the land to smaller farmers. Size of the land
holdings has been getting smaller over the years due to its division among the
family.

4. Navsari, Gujarat, Western India (Aatash Shah) Remittances from abroad are
fuelling land price appreciation
Navsari is located in southern Gujarat which has historically been a rich rural belt
with good water availability and fertile soil along with proximity to large industrial
centres. The main crops in the area are sugarcane, rice, mango, sapodilla and
vegetables. Navsari has benefited due to its proximity to Surat and also from the
fact that a large number of people have migrated abroad over the past several
decades and are remitting their earnings. Farmers have benefited a lot from
increased prices of sugarcane and also by appreciation in prices of their land
holdings. The increasing farming income and/or the one-time increase in
prosperity from sale of land has led to increased consumerism and a movement
towards semi-urbanisation.

5. Nashik, Maharashtra, Western India (Prabhat Awasthi)


Nashik, a city about four hours drive from Mumbai is both an industrial and
agricultural hub. The crops in the area include onions and tomatoes, grapes,
cotton, rice and sugarcane. We met with two farmers (including a visit courtesy
Jain irrigation), visited a tractor and UV+car dealer and spent time with people at
Mahindra Finance branch at Nashik.

6. Maddur and Mandya, Karnataka, Southern India (Anup Sudhendranath)


Paddy and sugarcane are the main crops grown in the area. Typically, farmers are
able to grow paddy crops twice a year and sugarcane once a year. Land is fertile
and there is a constant source of water supply from the nearby KRS dam in
Mysore. This meant that the drought last year did not effect the production much,
as water supply from the dam was sufficient.

7. Cochin, Kerala, Southern India (Pinku Pappan)


Farming is not a major driver of the economy in Kerala, and has progressively
declined over the past several years due to government apathy and labour issues.
Paddy and banana are the major crops cultivated, although not on a very large

Nomura 8 27 January 2011


Strategy | India Prabhat Awasthi

scale. Spices and tea cultivation happens on a larger scale, albeit with corporate
participation.

Overall incomes are increasing, which is visible in consumption of discretionary High literacy levels can cause
items like cars and white goods. Kerala, because of its highly literate population, is further labour shortages
a test-bed for new product testing and feedback. Brand awareness is quite high
and people are willing to try out new products and brands.

8. Mathias Nagar, Nagercoil, Trivandrum, Southern India (Harish


Venkateswaran)
The economy is primarily agrarian with principal crops being rubber, plantain,
paddy and coconut. Most families have some land holding, big or small. We met
farmers, car dealers, vehicle financiers in the region. Based on interactions with
locals we inferred that standards of living and disposable incomes have increased
significantly in the last two-three years. Literacy levels have also gone much
higher in the last few years, with several educational institutions sprouting up in
the area. People in the area were optimistic of further growth in the economy in
the coming years.

Nomura 9 27 January 2011


Strategy | India Prabhat Awasthi

II. Farming economics


1. Cochin, Kerala, Southern India
Higher output prices: Farming has become profitable more because of price Farming economics has vastly
increase in PDS (Public Distribution System) and less because of improvements in improved
output yields. Rains have been good recently and have contributed to increased
output.

Higher land prices and shortages: However, many farmers are surrendering
land to real estate companies due to the sharp run-up in land prices and non-
availability of labour. Kerala’s high population density has resulted in scarcity of
land, so much so that the state government has restricted farm land from being
used for other non-agricultural purposes. Famers complain that incentives for
farming have come down as farm workers have emigrated in search of stable
salaried jobs. Moreover, highly literacy levels in the state have added to farm
labour shortages.

Labour shortages: The general feedback was that shortage of labour is the
biggest problem for farming today. The younger generation and children of
farmers are not interested in farming. The shortage of farm labour has in turn
resulted in the existing workforce demanding higher wages. Many of them want
fixed pay instead of daily wages. Cheaper labour from north India is now
substituting local labour. However, as the labour required for farms is skilled in
nature, it is still difficult to replace.

2. Maddur and Mandya, Karnataka, Southern India


Income from crops: The paddy crop in the area sells for about INR1500 per Higher crop prices, labour
quintal on average with the range being INR1200 to INR1800. One acre produces shortages and rising land prices
about 25 quintals of paddy and farmers are able to produce two crops in a year
which comes to about 50 quintals per acre. The cost of production including the
seeds, fertilizers, etc is about INR20,000 per acre, which means profit of some
INR50,000 (US$1,094) per acre. Most farmers have about four acres of land,
which means profit of INR200,000 per year.

Land holdings: Average size of land holding is about three-four acres in the area.
There are only a few farmers who own eight-10 acres or more, and they are
leasing out land to smaller farmers. Size of the land holdings has been getting
smaller over the years due to its division among the family.

3. Rai Bareilly and Barabanki, Uttar Pradesh, North central India


Farm incomes: Farming land yields returns of 10-12% on average. One acre of
farming land in the area typically costs INR500,000-INR600,000. Typical income
per acre is INR78,000 and the expenses are around INR18,000/acre, thus yielding
a net income of INR60,000 per acre per year.

Higher crop and land prices: Sugarcane price has gone up from INR40-50 per
quintal in 2006 to INR200 per quintal in 2010. The price of land has gone up much
faster for land close to roads that are well connected to the city.

Agricultural implements: Agricultural implements such as cultivators and


Rotavators can be bought for INR12,000 to INR85,000. Most do not buy these
implements from dealers as company products are expensive compared to those
in the unorganised segment. Dealers face quality issues with customers if they sell
unorganised-segment implements, which is the reason that they do not stock them.

Increasing tractor usage: People now prefer to use tractors as bullocks are
difficult to maintain and the time available to till the land this way can be wanting.
Tractors have become much more viable for smaller farmers now. A tractor can be
rented at INR200/hr for some 10 hours per day. It costs INR80/hr to run the tractor.
Other expenses including drivers’ salary and food cost of some INR200/day

Nomura 10 27 January 2011


Strategy | India Prabhat Awasthi

yielding a profit of nearly 1,000/day. Thus if the tractor can be rented for 20 days in
a month, a farmer can earn 10,000 per month even after paying EMI of some
INR10,000 per month. Tractor usage in non-farm applications is as high as 50%
compared to 20% two years back.

Irrigation: Irrigation is done largely by canals and rain. Most farmers are not
aware of micro irrigation. They buy pipes by weight and lay them in the fields.
Farmers are not aware of any brands of urea or pesticide. They use whatever is
available.

4. Mathias Nagar, Nagercoil, Trivandrum, Kerala, Southern India


Significant rise in crop prices: The principal crops in the region are rubber,
plantain, paddy and coconut. Farming economics have considerably improved in
the last couple of years. This is on account of a significant increase in crop prices
in recent years. Prices of key crops have increased two to three times in the past
two years, according to local farmers. For example, rubber prices are now at
INR180/kg vs around INR60/kg at the peak of the economic slowdown. According
to farmers, the breakeven price of rubber in the region is close to INR60/kg. Hence
the disposable incomes of farmers have increased considerably. Revenue from
one acre is around INR35,000/month. Cost of maintenance is around
INR10,000/month leaving a profit of close to INR20,000-25,000 per acre per
month.
Fishermen are also seeing increasing prosperity. They are earning handsomely as
the price of catch has also gone up substantially in recent years.

Land price appreciation: The increase in crop prices has translated into a rise in
land prices as well. The demand for agricultural land has far outstripped the supply.
For example, one acre of rubber plantation costs around INR2mn now vs around
INR1mn, two years back.
Labour shortages: Inadequate availability of labour is the key issue in farming.
There are not enough labour hands to help in farming. Hence daily wages for the
labourers has shot up to INR300/day from about INR100/day two-three years ago.
According to farmers, labour shortage is mainly due to people moving to urban
areas or abroad for employment.

5. Navsari, Gujarat, Western India


Farm incomes: Sugarcane price has gone up from INR900 per tonne in 2006 to
INR2,500 per tonne in 2010. The yield is about 100 tonnes/acre on average
resulting in average revenue of INR250,000/acre from one cycle of sugarcane.
The investment for the farmer is about INR90,000/acre for sugarcane and hence
his profits would be in the region of INR160,000/acre from one cycle of sugarcane.
The average land holding in Navsari is close to four acres per farmer though the
farmers we met had higher land holdings of eight acres and 20 acres. Farming
costs are moving up by 10% every year.

Higher land prices: Price of land closer to the highway and the town is about
INR10-15mn/acre while price of land in the interiors ranges from INR2.5-5mn/acre.
Land prices have moved up about 3-4x over the past five years.

The yield on buying land today and growing sugarcane on it, in the best case
would be about 6%. Farmers, though, did not seem very eager to sell their land
and did so only because they either needed the cash or did not have descendants
interested in farming. Some farmers are selling their land closer to town and
highway and buying larger land parcels in the interior while saving some money.
Some farmers are turning entrepreneurs with the money they collect from the land
sale.

Labour shortages and mechanization: Farm labour is in short supply though the
reason is diversion towards industries rather than NREGA. Labour costs about

Nomura 11 27 January 2011


Strategy | India Prabhat Awasthi

INR50/day, up from INR30/day two-three years back but the labourers only work
4-5 hours in the day. This has resulted in increased mechanisation in the form of
tractor and harvester usage along with drip irrigation in spite of enough water
availability. People now prefer to use tractors as bullocks are difficult to maintain
and can not plough very quickly, which is sometimes needed.

Non-agricultural use of tractors: Tractors are being bought not just for usage in Tractors are also used to truck
farming but also to rent out for haulage purposes. There are a number of quarries heavy materials
in the area which require these tractors to transport the stone while infrastructure
projects in the region also require these tractors. A farmer renting out his tractor
for such purposes stands to make INR15,000/month after costs, making a tractor
purchase much more viable. At the same time, there have been issues in terms of
the farmers getting their payments on time. Some 60% of farmers are using
tractors currently.

Irrigation: Irrigation is done by canal and ground water. There is high awareness
of drip irrigation but not widespread usage given enough water availability.

6. Amritsar, Punjab, Northern India


Crops and harvest cycle: The summer crop (paddy) is sown in June, a little
before the onset of the monsoons, and harvested in October. The winter crop
(wheat) is sown in the beginning of November and harvested in April. The farmers
augment their incomes following the paddy harvest by planting vegetables with
short two-month life-cycles such as peas, radish, cauliflower and carrots. The
government has disallowed sowing of paddy in the two months following the wheat
harvest in April because of concerns about declining water table levels.
Crop economics: Based on feedback from a paddy farmer, the following are the
expenses from sowing to harvesting associated with one acre of normal paddy:

Exhibit 2. Income from one acre of paddy crop


Amount (INR)
Diesel: 30 litres @ INR38/litre INR1140
Urea: 3 bags @ INR285/bag INR855
Fertilizer INR500
Insecticide INR700
Growth hormone INR165
Labour (during sowing) INR1200
Harvesting (using combines) INR1000
Total expenses INR5,180
Total income INR19,440
Source: Nomura research

Based on feedback from a wheat farmer, the following are the expenses from sowing
to harvesting associated with one acre of wheat:

Exhibit 3. Income from one acre of wheat crop


Amount (INR)
Diesel: 20 litres @ INR38/litre INR760
Seeds INR400
Fertilizer INR500
Insecticide INR600
Growth hormone INR500
Labour (fertilizer) INR400
Harvesting (using combines) INR1200
Total expenses INR4,360
Total output = 15-20 quintals per acre @ INR1100/quintal INR16,500-22,000
Total income INR15,000 avg
Source: Nomura research

Nomura 12 27 January 2011


Strategy | India Prabhat Awasthi

The average land holding per farmer depends upon the region, but based on our
discussions we can assume an average holding of 5-7 acres. So pure farming
income for a typical farmer from the two crops (kharif and rabi) would be about
INR210,000 (US$4,595) per year, not including income from growing vegetables
and other supplemental non-farm income

Incomes have multiplied in pace with revenue and costs, providing seed The more money in farming, the
capital for expansion into non-agri activities: The general feedback from more room to branch out
farmers was that although crop prices have risen recently on the back of higher
MSPs (minimum support prices, set by the government), margins have remained
the same because input cost (labour, seeds, fertilizer, etc), inflation has kept up
with output prices. However, this means that income from farming activity has
increased at the same rate as output prices and input costs. This increase in
incomes has provided farmers with seed capital to expand into supplemental farm
activities like dairy and non-farm activities like construction and transportation.

Higher labour costs, but little impact from NREGA: The general feedback on
labour costs was that labour rates have risen commensurately with the increase in
cost of living. Most farmers we spoke to were not aware of NREGA. We suspect
that this is because NREGA wage rates are not binding at current levels as the
daily wage rates for farm labour exceeds NREGA wages, with temporary labour
wages at INR200/day. Temporary migrant labour (mostly from UP and Bihar) and
local (Punjab) daily wage rates have converged recently to INR200 (US$4.37)/day
from INR80/day five years ago, a 20% CAGR increase. Permanent labour salaries
have increased from INR10,000-15,000 five years ago to INR20,000-25,000 now,
about 10-15% CAGR. Development taking place in UP and Bihar along with
NREGA is putting pressure on availability of migrant labour, although the farmers
we spoke to did not feel that availability was a serious issue.
Land prices have shot up: Remittances from NRIs (Non-resident Indians) abroad
and increasing pace of residential and commercial construction activity in the
region are putting significant upward pressure on land prices. A wealthy farmer —
land holdings of 45 acres, in addition to running a transportation business on the
side — we spoke to informed us that his land is attracting a large premium amount
of INR15mn/acre. His own threshold price should he sell was INR20mn/acre. This
compares with a price of INR0.5-0.7mn/acre about five years ago. The enormous
appreciation in the price of this particular tract of land, we were told, was because
of a residential colony coming up adjacently. Also, large inflows of NRI money are
also fuelling the runaway appreciation of land holdings in the region and state.

Irrigation and drought: Even though Punjab is better irrigated compared to other
states in India, tube-wells are the main source of water for most farmers (80%
tube-wells, 20% canals) in the region. During drought, canals dry up because
water is rationed from upstream. Also, hydro power is a main source of power in
the state and electricity generation suffers in a rain-deficit year, impeding the use
of pump sets and forcing farmers to use diesel-based generators to draw water.
This raises expenses in a year in which revenue has already been hit because of
low agricultural yield. The farmers we spoke to were not aware of drip irrigation.

7. Nashik, Maharashtra, Western India


Farm incomes have multiplied: We met with two farmers and a tractor dealer.
The general feedback was that farm incomes have accelerated significantly over
the past three-four years. Farmers who have succeeded in tapping export markets
end up making as much as INR0.4mn/acre (realisation per acre of approximately
INR0.6mn and costs of approximately INR0.2mn/acre). In the domestic markets,
returns are stacked up according to the risks associated with a crop. Grapes fetch
a profit of INR0.2mn/acre, vegetables INR0.15mn/acre and sugarcane
INR0.1mn/acre. All these numbers have possibly more than tripled over the past
four-five years.

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Strategy | India Prabhat Awasthi

So have land prices: Land prices are up 4x in the past three-four years in general
and have shot up even more closer to the city, led primarily by the real estate
sector. Land prices have largely followed improved farm economics and therefore
may not come down. Closer to the city, farmers sell their land, reap a profit and
move inwards to buy land at cheaper prices. The combined impact is a massive
wealth effect through major profit increase and quadrupling of land prices.

Machine trumps beast: An interesting conversation with a tractor dealer was on


the economics of owning a tractor vs bullocks. The table below shows this in some
detail:

Exhibit 4. Tractor vs Bullock


Comparison point Tractor Bullock cart
Capital cost Rs210,000 for a 15 HP tractor Rs75,000-90,000
Running cost Rs.400/8 hr Rs300/day
Maintenance Rs650/250 hrs Replacement after useful life
Productivity 2.5 acres/8 hrs 0.25 acres/8 hr
Source: Nomura research

Clearly, considering the much higher productivity of tractors, they make better Unlike bullocks, tractors can be a
economic sense. It was also pointed out that bullocks need feeding even if they cash cow
are not being used. Tractors are also used 30-40% of the time in haulage work
which is available more frequently on account of public works. While tractors vs
bullocks looks like no contest, the buying decision does depend on capital
availability and land holdings. Given that cashflows have seen a significant jump,
the capital cost bridge has become easy to cross. According to the tractor dealer,
35% of tractors are being bought for cash against 10% earlier.

Labour shortages: The other interesting commentary was about labour


shortages. Grapes, which require manual labour due to the nature of work in the
crop, face labour shortage more than other crops do. Typically, labour is required
for five months in the whole year (for two crops). According to the farmer we met,
he pays INR50,000/labourer for these five months to ensure availability of labour.
On a per-month basis this works out to INR10,000/month, significantly higher than
NREGA wages and comparable (even higher) than the cost of manual labour in
urban areas.

Exhibit 5. Combine at work near Amritsar, Punjab Exhibit 6. Tractors hauling sand in Amritsar, Punjab

Source: Nomura research Source: Nomura research

Nomura 14 27 January 2011


Strategy | India Prabhat Awasthi

III. Impact of government schemes


1. Cochin, Kerala, Southern India
No NREGA impact: We found no impact from NREGA as the daily labour rate for
farming is much higher than NREGA wages. NREGA is seen as more of a side
income by labourers and is mainly for low skilled jobs.

Subsidies and crop loans: Subsidies on farm equipment like tractors are
available, though it takes time and is a lengthy process. However, most famers opt
for subsidies.

Most farmers have only small fields so they are disadvantaged when it comes to NREGA wage rates are not always
crop loans which are limited to the value of land. Most of the time, farmers do not binding
avail themselves of these loans due to the lengthy process involved and the
meagre loans they can tap.

Farm waivers: There has been negligible impact from farm waivers. Most farmers
who could get their loans waived had already paid back most of their loans and
were hence ineligible. Farm loan waivers have mostly benefitted only the large
scale farmers with political connections.

2. Rai Bareilly and Barabanki, Uttar Pradesh, North central India


NREGA and labour shortages: Government schemes like NREGA have created
a shortage of farm labour. Farm labour that was available for as low as INR60/day
two years earlier now costs at least INR100/day; labour is not available in many
cases even at those prices. Labour can be as expensive as INR150/day in Rai
Bareilly to INR180/day in Lucknow.

MSP increases: The hikes in MSPs (Minimum Support Price) have had a big
impact on incomes. Farmers especially benefited from high sugarcane prices last
year, which sold for as much as INR200/tonne in FY10.

Subsidy on tractors: There is a subsidy on buying tractors for INR50,000 from


UP Agro. But the process is difficult and people are not aware of the subsidy. It
also takes six months to get approval and hence is not very prevalent.

Public works: Rural infrastructure development activity has led to job creation
and opportunity for smaller farmers to rent out their tractors.

3. Mathias Nagar, Nagercoil, Trivandrum, Kerala, Southern India


Government support for farmers is basically in the form of subsidies for seeds,
fertilizers, pesticides and the like. The place receives abundant rainfall as it gets
monsoons which hit both Kerala and Tamil Nadu. The place has not been affected
by droughts in recent years.

Limited NREGA impact: NREGA has not had a big effect on labour availability or
wages. This is because the wages under the scheme are only around INR
100/day. Any healthy labourer can get 3-4x that and hence would not opt for the
scheme. So only the older labourers who have difficulty working have signed up
for this.

4. Navsari, Gujarat, Western India


No NREGA impact: Neither the farmers nor others we spoke to attributed any
impact to their work due to NREGA. According to the farmers, NREGA has not led
to any labour shortage.

MSP increases: There are no MSPs for the crops grown here except for rice and
the farmers directly negotiate the price with the sugar mills or in the markets.

Subsidy on tractors: There is a subsidy of INR45,000 for buying tractors from the
government on tractors below 35HP but these tractors are not large sellers. The
approval process is time-consuming.

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Strategy | India Prabhat Awasthi

Kisan credit card: Kisan (farmer) credit cards have been given to few farmers
which has helped them purchase inputs through short-term credit.

5. Mathias Nagar, Nagercoil, Trivandrum, Kerala, Southern India


Farm loan waivers: The government extends farm loan waivers to farmers but
the need for it was minimal. Some farmers got small amounts of loans waived off
under this category. According to the farmers, they were in a position to easily
repay the amounts.

6. Amritsar, Punjab, Northern India


Farm loan waiver: The farmer we spoke to had INR25,000 worth of loans waived
Rural public works can add to
as part of the farm loan waiver scheme of the government. labour shortages
Government schemes: NBFCs do not offer government incentive schemes. The
general feedback was that PSU banks take much longer in approving loans. They
pledge land when giving out loans to farmers. In contrast, NBFCs are much
quicker; they do not pledge land but require proof of residence in the form of ration
card, voter card, driver’s license, electricity bill or passport.

Minimal NREGA impact: Most farmers we spoke to were not aware of NREGA;
others said it was not an issue. We suspect that this is because NREGA wage
rates are not binding at current levels as the daily wage rates for farm labour
exceeds NREGA wages, with temporary labour wages at about INR200/day.

7. Nashik, Maharashtra, Western India


Higher procurement prices: Clearly, rising procurement prices have been the
primary drivers of the rural economy in the region. Additionally, rural roads and
other programmes under NREGA etc, have raised the level of work available in
rural areas.

Tractor sales have received a boost: Tractor sales are a key beneficiary of
benevolent government schemes as: 1) there is a benefit of using tractors in
construction works, and; 2) labour shortages created on account of the
government programmes also drive up tractor usage. The government has also
pushed higher the usage of internet and has schemes for sending SMSs on
“mandi” prices on a monthly subscription basis. Easy loan availability is another
by-product of government policies.

Exhibit 7. Unorganised sand mining in Mandia, Exhibit 8. Dish TV antenna on tiled roof in Maddur,
Karnataka Karnataka

Source: Nomura research Source: Nomura research

Nomura 16 27 January 2011


Strategy | India Prabhat Awasthi

IV. Availability of finance


1. Cochin, Kerala, Southern India
Loans – NBFCs preferred to PSU banks: For housing loans, the general
feedback here was that people in rural areas lean on NBFCs as the lack of regular
income and documentation make them ineligible for state bank loans. Also the
speedy processing attracts several customers towards NBFCs. In the rural
housing loans segment, Dewan Housing Finance limited is competition for
Mahindra Finance. For auto financing, other NBFCs like Muthoot Group is biggest
competition for Mahindra Finance.

Tractor sales have increased about 30% y-y in 2010, although dealers say they
expect it to come down this year with the change in government. PDS price
increase and thrust by current government on farming has led to the surge in
tractor sales.

Cash purchases as percentage of sales: Auto dealers say that about 15-20% of
sales are paid out fully in cash. They also add that many customers opt for auto
loans, even though they have the resources to pay cash in full, in order to avoid
income tax scrutiny. For tractors sales, the percentage of full cash sales is
negligible.

2. Maddur and Mandya, Karnataka, Southern India NBFCs are often preferred to PSU
banks because of quicker loan
Loans – NBFCs preferred to PSU banks: Mahindra Finance units in Bangalore
approvals, lesser documentation
and Mysore put together do about 1000-1100 disbursements per month – and convenience
Bangalore 800, Mysore (includes Maddur and Mandya) 200 and Kolar (northern
Bangalore) 100. In Mysore, this relates mainly to tractors, but in Bangalore they
also do passenger car financing and have tie ups with Hyundai, Maruti, CAT, JCB
etc. Of the overall portfolio, tractors are about 40%, 3 wheelers and pickups are
about 30%, small cars about 25% and 2 wheelers about 5%.

The typical approval time for loans is about 2-3 days vs banks which take about
3-4 weeks or so. Feedback received elsewhere seemed to suggest that this is one
of the main reasons that customers prefer NBFCs to banks.

Competition is rising: Shriram Finance is a well established player, but


competition from Kotak and L&T finance has been rising over the past two years.

Availability not an issue: Tractor availability did not appear to be a problem.


Feedback suggested waiting time of 2-3 weeks.

3. Barasat and Kolkata, West Bengal, Eastern India


NBFCs preferred to PSU banks: Mahindra Finance units at Barasat do about 45-
50 disbursements per month. This relates mainly to commercial vehicles and
some passenger vehicles as well. The typical approval time is about 2-3 days vs.
banks which take about 3-4 weeks or so. Feedback received elsewhere seemed
to suggest, this is one of the reason that customers go to NBFCs vs. banks. About
30% of all Mahindra vehicles sold in the area are financed by Mahindra Finance.

Competition is heating up: Shriram Finance is a well established player, but


competition from Kotak and L&T finance has been increasing. L&T Finance seems
to be building a sizeable presence in the area with focus on growing the loan book.

Availability is limited by tight supply constraints: Feedback suggested that Auto sales are hitting supply
availability of vehicles is a significant issue across the three dealers in the region. constraints
Most popular models where demand has consistently been strong over the last 6
months are Bolero, Scorpio, Xylo and Logan. Maximo and pickup trucks are the
popular commercial vehicles. Feedback suggested that demand for these vehicles
put together was about 20-25 units per month, but severe supply constraints have
meant that delivery is limited to only 6-7 per month. This situation has been there
for 3 months now and dealers seemed to be concerned that this has not corrected

Nomura 17 27 January 2011


Strategy | India Prabhat Awasthi

itself. Dealers sounded confident of selling at least 20 a month if availability were


not an issue.

4. Rai Bareilly and Barabanki, Uttar Pradesh, North central India


Cash sales rising: People in rural areas in general are now cash rich and require
fewer loans to finance purchases of vehicles. Hence, the proportion of cash sales
has gone up. Some dealers reported as much as 40% of auto sales without
organised financing.

Loan rates: Banks are offering crop loans at 6-7%. The amount of loans given is
INR20,000 per acre. Some times people divert these funds for other uses. The
IRR on tractor loans is about 22% and that for cars ranges between 14-16%.

Revenue split: For loans disbursed by Mahindra Finance, tractors form 13% of
revenue, UVs 50%, non-Mahindra autos 24%, CVs 11% and the rest 2%.

5. Mathias Nagar, Nagercoil, Trivandrum, Kerala, Southern India Full cash down purchases are
rising along with incomes
Farmers prefer NBFCs to PSU banks: There is not much support from the
government for farm-related financing. Farmers take loans from banks/NBFCs to
finance farming equipment. There are society loans (government-backed) for
agriculture at much lower rates but these are very difficult to obtain as they require
a lot of documentation. On the other hand, NBFCs provide financing quickly with
minimal documentation. They also have doorstep collection of payments every
month which saves the farmers trouble of travelling to the branches to pay their
EMIs. Hence, farmers prefer financing from NBFCs.

6. Navsari, Gujarat, Western India


Lack of proper documentation makes PSU bank finance difficult: Financing
for the purchase of tractors, consumer goods and automobiles is available to
farmers from both banks and NBFCs. Many farmers do not have appropriate
documentation and hence banks are reluctant to lend to them whereas NBFCs
take that risk. NBFCs IRRs are between 11-22% while banks lend at 12% and
below.

Cash sales increasing: As per the Mahindra Finance branch head and the auto
dealers we spoke to, people in Navsari no longer require financing to buy two
wheelers. Some 20% of all vehicles sold in Navsari are through full equity. Loans
are for a period of 5 years and lower.

Loan rates: Crop loans are available from banks and farmers who avail of these
often use them for purposes other than farming. Crop loan amounts are
INR20,000/acre at 6%. IRRs on tractor loans are 22% and for cars ranges between
14-16%. SBI, BoB and Kotak are the most aggressive lenders in this segment.

7. Amritsar, Punjab, Northern India


Based on our conversations with representatives of a leading NBFC we learnt the
following:

Loan portfolio: The composition of their loan portfolio: 90% autos, 10% non-
autos. Within autos: 40% cars, 20% tractors, 20% UVs, 20% CVs.

Loan rates: Interest rates (minimum loan amount INR50,000) across their product
portfolio: Tractors: 24% floating, 16.6% flat; prime customers pay lower rate. Autos:
rates have increased from the bottom; 16.5%; 14% (Special urban scheme); 10%
(1 lakh loan for 1 year). The 0% interest rate scheme is offered only to a few select
customers. The company earns servicing fees and subventions and hence has an
incentive to push 0% interest rate loans onto customers who would otherwise
have paid full cash down. No loans are given for farming activities (combines,
fertilizers, seeds, reapers etc). The company discourages financing of high-end luxury
cars because of low resale value.

Nomura 18 27 January 2011


Strategy | India Prabhat Awasthi

NBFC edge over PSU banks: PSU banks require much stricter documentation NBFCs are more nimble
and also pledge land, something NBFCs don’t do. NBFCs don’t extend
government schemes, something PSU banks do. NBFCs approve loans within 2
days, PSU banks take at least one month in disbursing the loan.

Competition getting hotter: The competitive landscape is getting tougher for


NBFCs operating in the area and customers have good bargaining power.
Mahindra Finance, Chola Mandalam, Magma, Sri Ram finance and HDFC are
some of the leading NFBCs in the region.

Cash as % of sales: On an overall basis, 40% of sales are full cash payment,
60% is financed. Of the ones who get financed, company policy is an 85% LTV
ratio.

Use of tractors: 75% for farming (ploughing), 25% non-farming (moving bricks,
sand, cattle)

Waiting period at dealers’ end: Maruti Swift diesel/Dezire: 2 months, UV (Bolero


SLX): 1 month, Tractors: no waiting, CVs: 1 month.

8. Nashik, Maharashtra, Western India


Government push and greater NBFC involvement: There has been a massive
improvement in access to financing because of the following factors: 1) while the
schemes for credit always existed, the push by the government has led to higher
disbursement and easier access to credit, and; 2) private NBFCs have become
very active in the last few years. Even though the cost of loans from private
NBFCs tends to be higher, flexibility in terms of getting a loan is equally high.

Loan rates: We were told that tractor loans from private NBFCs come at rates
between 14-20%, car loans at 14%, refinanced loan at 18-22%. Crop loans from
PSU banks are available at 6%. These are available against land holdings with
amount per acre being fixed. Farmers tend to use these loans for purposes other
than farming at times given the cheap rate of financing.

Exhibit 9. Food Corporation of India grain storage Exhibit 10. Drip irrigation facility in Nashik,
facility near Amritsar, Punjab Maharashtra

Source: Nomura research Source: Nomura research

Nomura 19 27 January 2011


Strategy | India Prabhat Awasthi

V. Change in consumption habits


1. Cochin, Kerala, Southern India
There has been an increase in discretionary spending in the state. Some of the
visible trends in consumption behaviour are:

Increase in brand awareness: Customers are willing to try out new products Increasing willingness to
before making the final decision. Also, novelty factor sometimes scores over experiment and explore new
practical factors, as evidenced by surge in sales of newer models of cars like Beat products
and Figo.

Up-trading: Many customers are opting to exchange 2-wheelers for cars. There is
evidence of up-trading within cars too – exchange offers for a new car in lieu of an
older one are much in demand.

Real estate: In terms of vehicles of investment, real estate is the most preferred
asset class for most in the area.

2. Maddur and Mandya, Karnataka, Southern India


Thriftiness: Even though the region has many such farmers who have branched
out into alternative businesses, the culture seems to be of not spending away the
money too much. The typical farmer has been investing back into his own
business for a long time and the only other place he invests his money is gold.
What do they spend on? Based on our conversations, the most popular FMCG
brands seem to be Lux, Lifebouy, Wheel, Good day, Five Star, Johnson &
Johnson baby products and Mysore sandalwood soap. The availability of these
products is not a problem – there are a couple of local stores about 3kms away
that sell these products. The farmers visit these stores on weekends. Most also
have a refrigerator at home with LG being the more popular brand among the 5 people
we asked. Reliance DTH has been running an offer in the area with a one year
subscription free, so most of the DTH subscribers here seemed to have a Reliance Big
TV connection. There were also many with a connection from the local cable service
provider who charges INR130 per month.

Other businesses contributing significantly: Both farmers we met said they


made more money from their other businesses than they did from traditional
farming. Both were committed to increasing their investments in these other
businesses over the next few years. Government schemes have benefited, but
many still seem to be averse to taking funding from the government as: 1) they are
able to invest surplus cash themselves into the business, and; 2) there were
issues with getting government funding approved.

3. Rai Bareilly and Barabanki, Uttar Pradesh, North central India


Wealth effects of land price appreciation: The manifold increase in land prices
Farmers prefer land and gold as
has brought significant new-found wealth in the region. Smaller landholders are stores of value
selling out as rich people invest in land, particularly land holdings that are well
connected to cities.

Consumerism on the rise: As people have become richer they are buying 4-
wheelers as a status symbol. About 10% people buy products outright with cash.
According to dealers, some people take loans to avoid suspicion of having too
much cash with them. Retail stores like Hariyali and Vishal Megamart have set up
their shops and people are beginning to explore them. People are buying ever more
mobiles and consumer durables. However, electronic goods and Dish TV penetration is
still low as electricity availability is erratic.

Strong auto sales: Growth in categories such as tractors and automobiles has been in
excess of 30%. It is likely to continue at the same rate for many more months
according to dealers due to strong growth in incomes and good crop prospects from
this last year’s rains. New auto dealerships are also penetrating slowly and some very

Nomura 20 27 January 2011


Strategy | India Prabhat Awasthi

rich people are experimenting with newer brands. By and large though they still prefer
tried and tested brands.

4. Mathias Nagar, Nagercoil, Trivandrum, Kerala, Southern India


Higher purchasing power driving auto and consumer goods sales: The
increase in disposable incomes and purchasing power have resulted in a sharp
increase in sales of automobiles, consumer durables etc. Car dealers have seen a
25-30% growth y-y in car sales. The target for coming months has been set a
further 15-20% higher, which is in line with the peak monthly sales ever. Two-
wheeler sales are also at an all-time high. All this has pushed up the waiting time
for sought-after models. For example, waiting period for cars like Swift and Swift
Dzire is 4-7 months, while for Wagon R it is close to 3 months at the local Maruti
dealer.

Increasing cash purchases: Close to 30% of car purchases are outright with no Rising brand awareness and
financing. Even in cases where financing is involved, the loan is about 50% of the amenability to up-trade
value. For commercial vehicles, financing is usually higher at about 80% of the
value. People either take auto loans from banks/NBFCs or gold loans to finance
their car purchases.

Strong brand awareness: While purchasing cars, people are very aware of
brands and their relative standing in public perception. According to the vehicle
dealers we met, people are buying cars more as a status symbol than anything
else. People who come in to buy lower-end models like Wagon R are easily
convinced to upgrade to higher-end models like Swift. Premium segment car sales
have also increased substantially. Brands like Skoda, Mercedes-Benz have seen
a significant uptick in sales in the last one year. Since there are no local dealers
for such cars, people travel to close-by cities to buy such cars.

Land and gold preferred investment vehicles: In terms of investment, the


preferred options are land and gold. Only a small part goes into bank deposits and
other investments. Housing has picked up in the past 2-3 years. Most people own
land and have a house right in the middle of their plot. Now with greater resources,
they are expanding their present houses by building new floors, extensions etc.

5. Navsari, Gujarat, Western India


Rising consumerism: The increase in incomes from farming, remittances from
NRIs and windfall gains from sale of land has increased consumerism a great deal
as per the people interviewed. However, most purchases are need-based and not
as status symbols. TV and mobile penetration is high and DTH was also quite
prevalent. A number of new auto dealerships have been set up in the last 2-3 years
and new brands which have set up their dealerships are Honda, Hyundai and GM.
Maruti and M&M have been the leaders to date. Mahindra Finance has financed the
same number of vehicles in 1H FY11 as it did in entire FY10 in Gujarat.

Preference for small-scale retail: Retail stores like Reliance have been set up in
the region but are not too popular with the local people who still prefer the mom-and-
pop shops because of credit availability. Also there is good amount of competition from
the local farmer co-operative shops.

6. Amritsar, Punjab, Northern India


Higher farm incomes providing seed capital to diversify into ancillary activities:
Farmers have benefitted from higher economic activity and growth which have
provided them with opportunities to supplement their incomes with ancillary
activities like dairy, supplying sand (spot selling of sand is used in construction,
which has seen significant growth in rural areas) and transportation. This
diversification into supplemental means of income has provided a big boost to
consumerism in the region. A farmer we spoke to had diversified into Basmati rice
(1121 variety), dairy (12 buffalos and 3 cows) and sand-supplying. He owned 5

Nomura 21 27 January 2011


Strategy | India Prabhat Awasthi

acres of land and owned one tractor (Mahindra 605) and one motor cycle (Hero
Honda).

Brand awareness stronger among the rich: We found that awareness of brands More diversified sources of
is a function of the size of land holdings, typically. The smaller farmers we spoke income and wealth effects from
to were neither picky nor aware of brands. The richer farmers were pretty clued rising land prices are
into latest consumer trends and owned the array of aspirational consumer underpinning changes in
consumption habits
durables – plasma TVs, luxury cars, washing machines, air conditioners, etc.

Wealth effect of higher land prices: Another factor driving rural consumption is
the wealth effect from rising land prices. A farmer told us that the price of his land
had increased from INR0.3-0.4mn five years ago to INR2mn now, more than a
40% CAGR. The price appreciation has been much higher for land close to a road
or area identified for residential or commercial development. Development of rural
roads has boosted trade and movement of goods between villages and cities
close by. There are also positive spill-over affects of development in neighbouring
states. A relatively well-off farmer, we learnt, has invested in tippers which are
being used to move road construction materials for a dam being built in
neighbouring state of Himachal Pradesh. Farmers with land holdings close to
roads have been particular beneficiaries of rising land prices, the wealth-effect
from which has spurred consumption further. There has been a large and steady
inflow of NRI remittances and this money has primarily been used to bid land
prices higher.

Land the primary reservoir of savings: Agricultural surpluses have also been
used to consolidate land holdings rather that being invested in other investment
classes like equities. Bank deposits are mainly used for working capital needs.

Housing – thatched no longer: The housing outlook, we learnt, is good. While 10


years ago most rural houses were thatched and paved and fortified with cow-
dung, almost all rural houses being built these days are made of cement and are
reasonably furnished with most modern amenities and white goods.

7. Nashik, Maharashtra, Western India


Rise of consumer durables: The changes in consumer behaviour are more
anecdotal in nature. We were told of farmers starting to buy LCD-TVs. Auto
dealers talked about farmers buying Toyota Fortuner which costs close to INR2mn
(US$45,000). Lifestyles are being influenced by television where access is rising
on account of direct-to-home operators. One of the farmers we met told us that he
has bought a Bolero for each of his sons when they turned 18.

Earnings reinvested in land: We also noted that the farmers talked about
reinvesting a significant portion of their earnings back into land.

Nomura 22 27 January 2011


Strategy | India Prabhat Awasthi

VI. Impact of information


1. Rai Bareilly and Barabanki, Uttar Pradesh, North central India
People are becoming more aware of brands through TV advertising, road connectivity
to cities and retail stores. The younger generation with cash is more willing to
experiment. With improved road connectivity and availability of transport rich people
also travel more frequently to cities to buy the latest apparel and consumer goods.
Retail stores are in initial stages but have been catching on as people get wealthier.
People are also able to get up-to-date information on crop prices through cell phones,
thus improving their ability to negotiate prices.

2. Mathias Nagar, Nagercoil, Trivandrum, Kerala, Southern India


Rural consumers are getting more tech- and brand-savvy. Almost everyone has a TV Technology, infrastructure, media
and cable connection in their house. The government had run a scheme last year to and mobile phones are mitigating
distribute free TVs to poor households. Many farmers have got TVs under this scheme. business risks and driving
Although the middle-aged farmers and their wives are not too brand-savvy, their consumerism

children, who are better-educated and are influenced by advertising, are very particular
about their brand preferences. They prefer to buy brands endorsed by their favourite
actors and actresses.

Mobile phones have had a significant positive impact on the daily lives of farmers and
fishermen. Most farmers have 3-4 mobiles in their houses which they share with their
labourers. For them, communication is vital between them and their labourers, to get
information about produce prices in other regions.

3. Navsari, Gujarat, Western India


The increased penetration of TV and mobiles has led to heightened awareness about
brands and increased consumerism. Mobiles have also helped the farmers regarding
information on weather and product prices. As per the farmers, given that they live in
joint families, somebody or the other is always watching TV in the house resulting in
demand for branded items by their kids and wives. An increasing number of computers
is also being sold to farmers’ children with internet connections.

4. Nashik, Maharashtra, Western India


There are couple of points here. First, cell phones have made a significant impact on
the availability of rural information. Farmers can subscribe to a service at INR30/month
to receive prices in wholesale markets (and can choose to take their produce to the
market where prices are higher). Second, at every “Panchayat” level the government
has made PC connection available. The Internet service is used extensively for price
information.

Nomura 23 27 January 2011


Strategy | India Prabhat Awasthi

VII. Other feedback from conversations with farmers

Maddur and Mandya, Karnataka, Southern India


Feedback from farmer: We met Mr Raju, who has about 4 acres of land on which he
grows paddy. However, over the years, he has diversified into other businesses. He
now runs a small factory where he manufactures bricks using a JCB machine. These
bricks are manufactured using sand, which is only allowed under licence along the
coast. However, because of the shortage of these bricks, there are many such illegal
operations running in places close to Bangalore. Mr Raju is only a sub-contractor and
does not deal with the final user himself.

This is a very profitable business. One truck load is worth INR16,000 in revenues and
excluding costs (INR6,000 for materials, INR4,000 for labourers, and INR4,000 as
bribe to local authorities to run the operation), he makes a net profit of INR2,000 per
truck load. He does about 25 truck loads in a month and has a net income of
INR50,000 per month from this operation.

He has been investing back into this business over the last few years and now owns
two of the JCB machines that he uses. One of them is fully paid for and he has an
outstanding loan on the other machine with an EMI of INR46,000, which he is able to
service using money he earns from his farm income as well as the bricks business.

Feedback from farmer: We met Mr Somanna, who has about 3.5 acres of land on
which he grows paddy and ragi. He has over the years diversified into manufacture of
raw silk. There is a big silk industry in the area and he supplies to the end users. He is
aware of the loans that the government provides to start a silk manufacturing unit, but
has opted to not take any loans because of the red tape involved in getting a
government loan approved. He produces about 200kg of raw silk, which gives him a
profit of INR25,000.

Also like many others in the area, this family grows most of the produce it needs. Only
a few items are sourced from the market such as FMCG products.
The government provides funding of about 60% to set up a silk worm house. It costs
about INR0.1mn to setup a house with the silk worms. However, he has opted to not
take the government funding.

Barasat and Kolkata, West Bengal, Eastern India


Feedback from farmer: We met Mr Dashrath Sarkar, who grows vegetables and
supplies them to the market in Kolkata and uses a truck on rental basis to transport the
produce from the farm to the market. However, he has recently bought a Mahindra
Geo to help in the transport of vegetables. He has made a down payment of
INR38,000 for this vehicle and pays an EMI of INR4,200 per month. He earns an
income of INR25,000 per month from this business and has about 2 acres of land. He
also gets about INR2000 from selling milk and INR15,000 from selling fish. His family
use HPC and FMCG products such as Lifebuoy soap and Britannia biscuits. He owns
a TV and a two wheeler.
Feedback from farmer: We met with Mr Hashnu, who has a brick manufacturing set-
up in Bashirhat. He has farmland of about 10 acres on which he grows paddy twice a
year. He said he has benefitted from the improving farm economics in the past 5 years
and the price which he gets for his produce is up significantly in the period. His biggest
concern is the increasing labour cost over the next couple of years. His brick
manufacturing unit earns his about INR0.1mn per month. He has spent on building a
new house in the area, and owns a variety of vehicles including a Mahindra Bolero. He
also owns four trucks (2 Tata, 1 Ashok Leyland and 1 Shriram), which help him
transport the bricks to the end-user. He owns variety of white goods including 2
air-conditioners, a refrigerator and TV with a cable connection.

Nomura 24 27 January 2011


Strategy | India Prabhat Awasthi

Feedback from farmer: We met with Mr Ramakant Das, who runs a variety of
businesses and lives in a village which is about 80km from Barasat. He owns about 3
acres of land. He makes about INR10,000 per month from cultivating vegetables,
INR10,000-15,000 per month from cultivating paddy and INR15,000 per month from
renting out his vehicle (a Maruti Omni). He has recently bought an Eicher truck and
has a loan amount of INR 0.7mn and an EMI of INR16,500.

He said the infrastructure in his village has improved dramatically over the last five to
seven years as new roads have been built under the Pradhan Mantri Gram Sadak
Yojna (centre-sponsored rural roads scheme). There are about 845 houses in the
village, which have all been rebuilt or revamped over the last 5 years.

Most homes in the village have a cable connection. Lifebuoy, Lux, Parle-G, Wheel and
Maggi seem to be the popular FMCG products.

Nomura 25 27 January 2011


Strategy | India Prabhat Awasthi

Valuation methodology and investment risks

Bajaj Auto (BJAUT IN)


We value Bajaj Auto based on DCF at INR1,810. This includes INR209/share of
bookvalue of investments. We are building in volume growth of 38% for FY11F and
15.5% for FY12F. We are building in 20.4% margins for FY11F and 19.7% margins for
FY12F. Risks include slower-than-expected volume growth; possibility of price wars
breaking out that could result in downside to our margin estimates; and a global
slowdown in domestic and/or export markets could present downside risks to our
volume estimates.

Mahindra & Mahindra (MM IN)


Valuation: Mahindra and Mahindra is our top pick in the India Auto sector. We value
Mahindra and Mahindra at INR 892/share. We value the standalone business at 13x
Average EPS of FY12 and FY13 (INR 51.2) at INR666/share and subsidiaries at INR
226/share. Key Risks: Ssangyong Motors acquisition: MM is planning to acquire
Ssangyong Motors in Korea (announced in August 2010). Below-normal rainfall in
2011: We have assumed a scenario of normal rainfall in 2011. Risks. If rainfall is
significantly different from normal, it could have a material impact on our volume
estimates. Excise duty increase: We have assumed that the excise duty will not be
increased from the current 10%. If it is increased further, it could have a material
negative impact on our margin estimates as the company may not be able to pass
through increases in excise duty on tractor components.

ITC (ITC IN)


We value the company using a sum-of-the-parts valuation methodology. We value the
core cigarettes business at INR149 per share based on a P/E multiple of 22x FY11F
earnings. The other core businesses are valued at around INR44 per share. We have
valued the net cash (after deducting corporate expenses) at book value. Risks: Policy
directives from the union government form the biggest risk to our investment view.

Jain Irrigation (JI IN)


We value JISL based on an earnings multiple of 20x our one-year rolling forward EPS
(methodology unchanged) to arrive at our target price of INR261.

Risks to our call are: 1) increased working capital intensity, leading to reduced
cashflows and margins; 2) reduction in government support for micro irrigation systems
(MIS) and government spending on infrastructure projects; 3) increased competitive
intensity leading to lower margins or market share for JISL; 4) volatile raw material
prices, which could impact margins; 5) further depreciation of the rupee against the US
dollar, which could increase forex losses; and 6) acquired companies not achieving
expected profitability.

DISH TV (DITV IN)


Our 12-month price target of INR64 is based on a DCF valuation methodology. The
key assumptions are: 1) explicit earnings forecasts until FY30F; 2) a discount rate of
11.5%, based on a risk-free rate of 7.0%, a market risk-premium of 4.5% and beta of 1;
and 3) terminal growth of 5% from FY30E onwards. The key risks to our positive
stance on Dish TV include: 1) irrational pricing by some competitors trying to garner a
higher market share, even at the cost of profitability, and; 2) excessive churn of Dish
TV subscribers to either competitors in the DTH market or to other platforms (such as
digital cable, and IPTV).

Nomura 26 27 January 2011


Strategy | India Prabhat Awasthi

Any Authors named on this report are Research Analysts unless


otherwise indicated
Analyst Certification
We, Prabhat Awasthi, Nipun Prem, Aatash Shah, Kapil Singh, Anup Sudhendranath, Pinku Pappan
and Harish Venkateswaran, hereby certify (1) that the views expressed in this Research report
accurately reflect our personal views about any or all of the subject securities or issuers referred to in
this Research report, (2) no part of our compensation was, is or will be directly or indirectly related to
the specific recommendations or views expressed in this Research report and (3) no part of our
compensation is tied to any specific investment banking transactions performed by Nomura Securities
International, Inc., Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures


Mentioned companies
Stock Sector
Issuer name Ticker Price Price date rating rating Disclosures
Bajaj Auto BJAUT IN 1306.20 INR 24-Jan-2011 Buy
Dish TV DITV IN 62.25 INR 24-Jan-2011 Buy 123
ITC ITC IN 168.95 INR 24-Jan-2011 Buy
Jain Irrigation Systems
Ltd. JI IN 225.05 INR 24-Jan-2011 Buy
Mahindra and Mahindra MM IN 790.00 INR 24-Jan-2011 Buy

Disclosures required in the U.S.


123 Market Maker - NSI
Nomura Securities International Inc. makes a market in securities of the company.

Previous Rating

Issuer name Previous Rating Date of change


Bajaj Auto Neutral 21-Jan-2010
Dish TV Not Rated 14-Jan-2010
ITC Neutral 29-Oct-2009
Jain Irrigation Systems Ltd. Neutral 21-Aug-2009
Mahindra and Mahindra Not Rated 16-Sep-2010

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Nomura 27 27 January 2011


Strategy | India Prabhat Awasthi

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Africa, US and Latin America for ratings published from 27 October 2008
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appropriate valuation methodology such as discounted cash flow or multiple analysis, etc.

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next 12 months.
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Explanation of Nomura's equity research rating system for Asian companies under
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A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of
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Nomura 28 27 January 2011


Strategy | India Prabhat Awasthi

SECTORS
A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during
the next six months.
A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark
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Explanation of Nomura's equity research rating system for Asian companies under
coverage ex Japan published prior to 30 October 2008
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Strategy | India Prabhat Awasthi

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Strategy | India Prabhat Awasthi

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