Amid mixed signals from auto and FMCG, how to play the rural economy theme on the Street

That along with projections of a normal monsoon by weather office have optimists betting big on the rural theme.

Monsoon delivers about 70 percent of the country's annual rainfall, and a normal season typically boosts demand for two-wheelers, tractors, consumer staples and FMCG products.

Though cost pressure continues to haunt businesses across the board, all is not lost in pockets such as two-wheelers and commercial vehicles — farm equipment in particular.

Yet, the same cannot be said for FMCG players.

That despite a chain of price hikes and grammage reductions.

"In the current uncertain times, the rural play is defensive and if the monsoon plays out as forecast, we could see a faster recovery from the rural side. However, it may not be uniform across population segments, which is why auto sales are looking better than FMCG sales," Deepak Jasani, Head of Retail Research at HDFC Securities, told CNBCTV18.com.

"The lowest strata of rural population seems to be still struggling," he said.

Geojit Financial Services analysts Saji John and Vincent K are banking on positive rural sentiments due for the following reasons:

Onset of normal monsoon

Better crop yield

Increase in kharif crop sowing

Policy support such as steps to ease cost of edible oils

Both have a positive view on auto and FMCG stocks with a selective approach.

Price hikes and unpredictable supply of electronic components have affected production volumes for major automakers, said John, who likes TVS Motor, Mahindra & Mahindra and Minda Industries among auto stocks.

FMCG and auto continue to be reliable consumption themes for the long term, but investors need to be careful in evaluating stock-specific business models," Tanushree Banerjee, Co-Head of Research at Equitymaster, told CNBCTV18.com.

She said they need to take into account:

Input cost pressures

Technology changes

Firm interest rates

Market expert Ajay Bagga is not convinced.

"Even though there is a recovery, dislocations due to general inflation and particularly inflation in agri inputs such as chemicals, fertilisers, diesel and irrigation equipment means the rural economy is challenged. There is no starvation but the rural surplus is not growing at a desirable trajectory," he told CNBCTV18.com.

"Still at least 2-4 quarters before we see rural consumption pick up. Risks are elevated and it’s not a theme to chase at present," he said.

Though auto volumes as a whole are a mixed bag compared with pre-COVID levels, two-wheeler volumes still have some distance to cover in volume terms.

Market expert Ajay Bodke told CNBC-TV18 that basis his interactions with FMCG managements, there is a clear indication there is an emerging backlash from consumers to large double-digit increases in various categories.

The rural demand remains quite tepid, but "hopefully with a normal monsoon as we move into the busy season should alleviate some pressure on oil demand. The concerns of downgrading remain."

He has a list of areas to avoid or at least remain underweight on:

Staples durables

Two-wheelers

Cement (where power and coal costs continue to hit margins hard)

Paints

Tractor demand should hold up as the country moves into a busy season with a normal monsoon, he said.

He prefers Mahindra & Mahindra from the auto pack.