Beneficiaries of a normal monsoon…

The Indian economy is heavily dependent on monsoon rain. A normal and well-distributed monsoon usually results in an uptick in farmers’ income, which leads to an increase in the demand for consumer and automotive products in the rural market. There is a very strong correlation between the monsoon and the performance of the Indian economy & the stock market.

The Indian Meteorological Department (IMD), in its first stage of forecast, sees a ‘normal’ monsoon this year, likely around 97% of the long period average. In 2017, the southwest monsoon was near-normal at 95% of the long period average, but patchy.

Sectors such as agro chemicals, FMCG, automobile, rural-focused non-banking financial services companies (NBFCs) are likely to benefit greatly from a normal monsoon. While some companies are directly dealing in the agriculture market like seeds, agrochemicals, fertilizers, tractors, irrigation etc. certain other companies are indirectly benefited from a robust rural economy like FMCG and auto.

A robust monsoon and expected hikes in the minimum support rates are likely to usher improved expectations for the farm income. Higher acreage and yield on the back of improved farmer sentiments coupled with a recovery in farm income are likely to bolster agrochemicals & irrigation business growth in FY19. Companies like EPC Industries, Rallis India, UPL, Dhanuka Agritech, Deepak Fertilizers, GSFC etc. are expected to benefit.

The central government has time and again reiterated its aim to double farm income by 2022 through better productivity and enhanced farm realizations.  Agricultural credit was increased by 10% and fixed at a record level of 11 lakh cr in the last budget, which is expected to drive demand for tractors, tillers, tractor engines & farm equipment. Companies like Escorts, Swaraj Engines, M&M, VST Tillers Tractors etc. are expected to benefit.

Strong growth in the rural economy usually results in expansion of credit and also facilitates consistency of repayments. We expect this to benefit companies like Manappuram Finance, STFCL, M&M Financial Services Ltd, Muthoot Finance, Bajaj Finance etc.

Lastly a vibrant rural economy is likely to boost FMCG & automotive sales. In the FMCG space we expect companies like Jyothy Labs, ITC Ltd, HUL, Britannia, Asian Paints, Godrej Cons. etc. to benefit from increased demand given their distribution reach. Among automotive stocks M&M (present in different segments), Hero Moto Corp & Maruti are expected to be the biggest beneficiaries. Hero Moto is the largest two-wheeler manufacture in India having a market share of 38% in which 50% market share in the motorcycle category with a low cc engine. Rural sales account for about half of the total sales volume. Even for Maruti their sales beyond the top tier cities have been growing at a faster pace & it is by far the favorite four-wheeler brand in rural areas.

To sum up, an indication of how critical monsoons are, financials, FMCG, and the automobile sector make up more than half the Nifty’s weight. So any change in the expectation of earnings of these sectors on the basis of the monsoon rains is positive not only for these stocks but to the index as a whole.

Greaves Cotton Ltd – Re-aligning growth strategies

Sharda Cropchem Ltd- Generic Growth

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.