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India heading for record foodgrain production – Deutsche Bank Equity Research

India may be headed for its highest ever foodgrain production and it will further ease India’s external trade deficit, Deutsche Bank Equity Research India has said.

It said India was heading for a record food production thanks to the abundant monsoon rains this year.

“Based on our analysis of foodgrain production estimates of individual states, presented at the recently held National Conference of Agriculture, we believe that India’s foodgrain production is likely to sharply exceed the government’s initial estimate of 257.8mn tonnes.

“Eight key states, which together constitute 70% of India’s foodgrain production, have stated that they are targeting aggregate growth of 9% yoy in FY14. States like Andhra Pradesh (constituting 7% of India’s foodgrain production and its population) and Madhya Pradesh (9%, 6%) are targeting double digit growth of ~21% yoy. Based on this analysis we believe that actual foodgrain production in FY14 may grow by close to 7-8% YoY with a strong possibility of India recording its highest ever foodgrain output,” it said.

Deutsche Bank said the benefits of the record production would be seen in a higher GDP, higher rural demand and a lower trade deficit through both rising exports and lowering imports (oilseeds and pulses). Importantly, overall agricultural production growth is likely to be driven by an across the board increase in all key components – cereals, pulses and oilseeds, it said.

Strong agricultural output, in addition to boosting rural GDP and rural demand, will also benefit India’s external accounts by easing pressure on trade deficit, which will consequently help the rupee.

“Agricultural exports have over the years grown in significance, rising to US$41bn in FY13 or 13.5% of total merchandise exports in FY13, from ~10% between FY06-FY11. We believe that agricultural exports could rise further this year, as India will likely post a strong agricultural surplus due to high output.

“Similarly, we expect easing pressure on imports of edible oils and pulses (which cumulatively at US$14bn, account for ~86% of food imports, which in turn constituted 3% of merchandise imports) as India is expected to post record output of pulses and oil seeds,” it said.

It pointed out that as per the estimates of Prime Minister’s Economic Advisory Council (PMEAC), pulses output is likely to exceed 20mn tonnes (highest ever), which will lower the import bill for pulses (India imports 2-3 mn tonnes of pulses to bridge the domestic demand-supply gap). Similarly, the PMEAC expects oilseeds production to exceed the all-time high production of 32.5mn tonnes (in FY11), which should help contain edible oil imports at 10 mn tonnes or lower.

“With urban India seeing muted growth on rising interest rates and high inflation, investors should focus on companies which have invested in building a presence in rural India. Stocks with a rural focus constitute the following – M&M and Maruti should be key beneficiaries in auto sector (65% and 30% of sales respectively from rural India. Maruti aims to increase its distribution reach to 100,000 villages this year versus 45,000 last year). Bharti (43% of subscribers are rural), ITC (more than 50% of cigarette revenues from rural India), HDFC Bank (more than 70% of branch additions over past three years has been in semi urban and rural areas), M&M Finance (20% of its AUM is in tractors). Shriram Transport, Grasim and Shree Cements (40-50% of cement sales derived from rural and semi urban India). Investors should keenly watch the upcoming festive season (Oct-Nov) which has traditionally been a good indicator of aggregate demand. Initial evidence coming from Eastern India – currently celebrating the Puja season, heralding the beginning of India’s festive season calendar – seems to have begun on a good note,” it added.

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