Equally-distributed rain usually gives a fillip to demand for products from rural areas, and results in an increase in rural citizens' purchasing power.
The monsoon and D-Street have one thing in common -- they both are unpredictable. But what is predictable is how the monsoon will impact certain sectors and stocks.
The Indian economy is heavily dependent on monsoon rain, and 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."Monsoon rains are the lifeblood for the Indian economy and are very critical for the farm sector, which accounts for about 15 percent of India's economy. There is a very strong correlation between the monsoon and the performance of the Indian economy along with the stock market,"
DK Aggarwal, Chairman, and MD, SMC Investments and Advisors, told Moneycontrol.
"A good monsoon creates positive reading about the economy among the investors, including foreign institutional investors and a stronger economic outlook would lift the sentiments of the investors, mainly companies selling products in rural areas from the sectors such as FMCG, consumer goods, automobile," he said.
Equally-distributed rain usually gives a fillip to demand for products from rural areas, and results in an increase in rural citizens' purchasing power. It also lifts the groundwater level, which leads to better irrigation. This is positive for all fertiliser and agriculture stocks.
The Indian Meteorological Department (IMD), in its first stage of forecast, sees a 'normal' monsoon this year, likely around 97 percent of the long period average. In 2017, the southwest monsoon was near-normal at 95 percent of the long period average, but patchy.
The India Meteorological Department (IMD), the country' official weather forecaster, in its 08:15 am bulletin, said that monsoon would hit Kerala in the next 24 hours.
"There are Monsoon-like conditions over Kerala and we can say that the annual rainfall season has arrived," said Jatin Singh, CEO of private weather forecaster Skymet.
Monsoon is the lifeblood for India’s farm-dependent $2 trillion economy. As many as a dozen sectors depend on it, either directly or indirectly, experts believe.
Sectors such as agro chemicals, FMCG, automobile, rural-focused non-banking financial services companies (NBFCs) are likely to benefit greatly from a stable monsoon.
"Indian companies derive a significant portion of their earnings from the rural areas of the country. While some companies are directly dealing in the agriculture market like seeds, agrochemicals, fertilizers etc; certain other companies are indirectly benefited from a robust rural economy like FMCG and auto," Deepak Jasani, Head - Retail Research, HDFC Securities, told Moneycontrol.
"A deficient/excess rainfall leading to crop losses result in lower earnings for farmers resulting in lower rural demand and lower sales. Another sector affected due to the health of the rural economy is banks, NBFCs, and micro-finance institutions," he said.
Jasani pointed out that banks, 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 for these stocks and to the index as a whole.
The southwest monsoon plays a significant role in India's economic progress and more predominantly, in the agriculture sector's progress. This is because it accounts for 70-75 percent of the total rainfall that India gets in a year and is therefore, of high significance in the agricultural calendar.
We have collated a list of twelve stocks which are likely to benefit the most from normal monsoon:
Analyst: Anita Gandhi, Whole Time Director at Arihant Capital Markets
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 business growth in FY19.
The company is witnessing healthy financial growth across all business segments. Its diversification efforts paid off as overall growth is well supported by robust growth witnessed in new businesses.
The management expects to maintain the strong growth momentum in all three new business segments, including rural India as well as the gold loan segment. Strong growth in the rural economy usually results in expansion of credit and also facilitates consistency of repayments.
The management expects positive demand growth for tractors and higher market share due to the government’s continued thrust on the agri and the rural sector.
The central government has time and again reiterated its aim to double farm income by 2022 through better productivity and enhanced farm realizations.
It is a leading supplier of the tractor engine. The company is one of the key players to benefit from this transition.
The company is an India-based chemical manufacturer. It operates through four divisions that include chemicals, veterinary, environ-biotech and pharma. Excel is also a leading supplier of specialty intermediaries to agrochemical producers.
Analyst: Ritesh Ashar Chief Strategy Officer, KIFS Trade Capital
The major income of VST Tillers comes from manufacturing and marketing two agricultural aid equipment i.e. Power tillers and Tractors. The company sold total 7,399 units in March 2018 against 6,023 units in March 2017 which saw a growth of 23 percent.
It sold 1808 tractors in March 2018 against 1398 in March 2017 which marked a jump of 29.3 percent. The power tiller volumes were up by 21 percent at 5591 units versus 4625 units in March 2017.
The company has started commercial production at its new power tiller plant at Malur, Karnataka which will add to revenue. This geographical expansion along with their expansion of product portfolio in tractor segment and also the good monsoon will be beneficial for the company.
The company posted a net profit of Rs 329 crore for the quarter ended March 2018. The net profit rose 41 percent as compared to the corresponding quarter a year ago on a standalone basis which was Rs 238 crore.
GSFC expects payment of balance Rs 700 crore as a subsidy in 1-2 quarters. Melamine plant capex is expected to be commissioned by September 2018. The recent budget was full of agriculture space which also added spark to the script, and now with good monsoon, we can see good volumes as well.
The company has been continuously growing in each business parameter. Its rural demand is expected to rise because of normal monsoon forecast.
A likely hike in government support prices for agri commodities is a positive for the stock. The launch of the new MPV should also boost utility vehicle segment volumes.
Deepak fertilizers is one of India’s leading producers of industrial chemicals and fertilizers. The net profit for Q3 reported by Deepak Fertilizers and Petrochemicals saw a rise of 12 percent also the revenue of the company saw a growth of 50 percent.
The demand for fertilizers and agri-inputs is highly correlated with the level of monsoon rainfall. The expected monsoon in India will definitely be fruitful for this fertilizer stock.
Analyst: Vinod Nair Head of Research at Geojit Financial Services
We expect the company to witness strong demand supported by the consecutive normal monsoon. Currently, 40 percent of its revenue is from rural and the management expects 60 percent of the growth will be from rural.
Given the company's focus on rural penetration backed by consistent innovation and brand building agenda (A&P to sales ratio at 9.3 percent against 7.2 percent YoY), we factor 12 percent CAGR in revenue over FY18-20E. Currently, JLL is trading at 34x 1Yr Fwd P/E against last 1-Year average of 36x.
Bata with its new focus on opening stores in Tier II & III cities is expected to benefit from the normal monsoon. To accelerate growth, BIL is adding 300-350 stores via franchise route in next three years and has already identified 435 small cities.
We expect revenue to grow at 11 percent CAGR over FY18-20E aided by demand improvement driven by good monsoon along with store additions, increasing premium mix, and higher advertisement spending.
Further, improving efficiencies & premiumisation will continue to support margins and we estimate 17 percent CAGR in the net profit over FY18-20E. BIL is currently trading at its 3-year Avg of I-Yr Fwd P/E of 36x.
Hero Moto is the largest two-wheeler manufacture in India having a market share of 38 percent in which 50 percent market share in the motorcycle category with a low engine. The company would be a key beneficiary of the improvement in rural disposable income because rural sales account for about half of the total sales volume.
HMCL volume grew by 24 percent on a YoY basis for the full year FY18 and the trend is likely to continue for FY19. We expect revenue CAGR of 10 percent over FY18-20E led by new product launches, superior product mix and increase in rural income due to higher crop productivity owing to favorable monsoon.
At the current price the valuation looks reasonable on a 3-year historical average and we value HMCL at a P/E of 18x FY20 EPS.
Escort will be a direct beneficiary owing to the government’s focused approach to encourage farm mechanisation and growth in infrastructure segment. The total allocation for Rural, Agriculture and Allied sectors was Rs 2 lakh core which is 10 percent higher than the previous budget.
Agricultural credit has also increased by 10 percent and fixed at a record level of 11 lakh crore, which is expected to drive demand for tractors.
We expect revenue and net profit to grow at 16 percent and 34 percent CAGR over FY18-20E led by 15 percent volume growth in tractor segment and new product launches.
We believe that the current valuation is at a premium on a better earnings outlook on the back of normal monsoon and massive government push for rural.Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.