The Indian rural market is on a roll. With a size pegged at almost USD 425bn and a per capita consumption that now exceeds the urban market, rural India is the new growth area for companies from sectors as diverse as telecom, vehicle manufacturing, agriculture service and product providers, financial services, consumer durable and FMCG companies. Better monsoons and the National Rural Employment Guarantee Act (NREGA) has shored up the disposable incomes in agri-based non-urban India translating into more non-food spend. Read More @ http://multi-act.com/the-rural-story-of-moats-fundamentals/ Website - http://multi-act.com/ Contact Us - http://multi-act.com/contact

1. Published in July 2014

2. Size USD 425 billion
Companies from
diverse sectors are
finding new growth
areas in rural India
Per capita
consumption greater
than urban markets
Nielsen India puts the
rural consumption
growth at 18.7%
annually in 2013
RBI says average
nominal rural wage has
increased by 17% from
2008 to 2013
NREGA has shored up
disposable incomes in
agri-based non-urban
India translating into
more non-food spend
While growth of Indian
metropolitan urban
consumption is 10.8%

3. Telecom
Agricultural Service &
Product Providers
Vehicle
Manufacturing
Financial ServicesFMCGConsumer Durables

4. • Companies that have been able to take advantage of increasing
rural prosperity are companies which have strong rural-centric
moats
• A moat in the form of a well-established system of distribution
channels, or catering to a uniquely rural market requirement,
gives companies the scale benefit.
• Consumer goods companies, agricultural suppliers and vehicle
manufacturers, who have had this advantage over their
competitors, are in a better market position.

5. High quality companies with a strong rural ‘moat’ have been able to
derive significant benefit to their businesses by leveraging their
familiarity with this market.
Vast service
network in rural
and semi-urban
markets
Rural sales share
grew to 30% in
2014E from 3% in
2008.
18% increase in
sales from rural
markets (April-
November 2013)
Operates 700 rural
outlets
Has offset the
overall industry
trend of declining
sales for 2013-14
Note: The mention of the above company serves as an example of ‘The Rural Story of Moats and Fundamentals’. This does not indicate any
investment proposition in the company.

7. • Considering a strong moat can help companies chart success in rural
markets, companies with shaky fundamentals have not been able to
sustain their rural market story.
• For example, in sectors that cater to the booming agriculture-based
economy, a company with better fundamentals should have a
dramatically different growth story than a company with a similar moat
but one which is also facing corporate governance issues.
• A good comparative study is of German company which sells products
for crop protection, and an Indian company which manufactures
irrigation systems. Both companies cater to the highly lucrative agri-
input sector.

8. • The historical fundamentals of these
two companies show a contrast in
underlying business management and
profitability.
• Although the Indian company was a
market favorite till half a decade ago, it
has had issues with bad asset
allocation and high debt in the past
few years, which reflect badly in the
return ratios.

9. The Indian company is leveraged, while the
German company has net cash on balance sheet
(i.e. no balance sheet risk).
German firm has enjoyed a much higher return
on equity (ROE) and return on capital employed
(ROCE) as compared to the Indian company.
Indian company has significant negative free cash
flow (FCF) generation, the German one has a
positive FCF.
The German company has been able to leverage
the rural moat due to its strong fundamentals.
One can also see the difference in the way the
price of these companies have compounded over
a period of time.
The Indian company, a front runner in the micro-
irrigation field, still has to recover from
diversifications gone bad.

10. • While the rural theme is significant as an opportunity for
improving performance, a company’s fundamentals are
what eventually play an important role in making it a high
quality stock.
• From the perspective of an investor the inherent quality of
the company or the business is more important than the
larger theme (i.e. access to the rural markets or having a
rural moat). Investing in a high-quality business reduces
the odds of losing money even if the “theme” does not play
out.

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