“If the monsoon predictions are accurate, the agricultural sector is set for a boost. Rain vs Food inflations although are not so directly related deficient rainfall should theoretically result in lower crop output and drive up prices due to a demand-supply mismatch,” Ritesh Ashar – Chief Strategy Officer (CSO), KIFS Tarde Capital told Moneycontrol.
The Indian Meteorological Department (IMD) on Monday, in its first-stage forecast, predicted ‘normal’ South-West monsoons (June-September 2018) which could put a lot of agri, FMCG and auto stocks back on investors’ radar. Quantitatively, rainfall activity is likely to be 97 percent of long period average (LPA) as against 95 percent actual rainfall last year, it said. If the forecast holds true, this will be the third consecutive year of normal monsoon.
Indian companies derive a significant portion of their earnings from rural areas. A deficient/excess rainfall results in crop losses, leading to lower earnings for farmers. This in turn results in lower rural demand and sales.
Deepak Jasani, Head-Retail Research, HDFC Securities, said that while some companies directly deal in the agriculture market by providing seeds, agro-chemicals, fertilisers etc, others indirectly benefit from a robust rural economy like FMCG and auto.
“Another sector affected due to the health of the rural economy is banks, NBFCs, and micro-finance institutions. Banks, FMCG, auto account for more than 50 percent weightage in the Nifty. Any change in earnings expectations of these sectors due to the monsoon will drive performance of these stocks and of the index as a whole,” he said.
The biggest sector to be directly impacted by a normal or deficient rainfall is agriculture or the farm sector. The sector employs over 50 percent of India's workforce and contributes nearly 15 percent to GDP.
Ritesh Ashar, Chief Strategy Officer, KIFS Tarde Capital, said the agricultural sector is set for a boost if the monsoon predictions are accurate. He was also spoke of the indirect relationship between the monsoon and food inflation. "Although they are not so directly related, a deficient rainfall should theoretically result in lower crop output and drive up prices due to a demand-supply mismatch.”
Sounding a cautionary tone, he said that though rains are necessary, what is more important is its quantum and distribution.
Here is a list of top 10 stocks which are likely to benefit the most from a normal monsoon:
Analyst: Ritesh Ashar, CSO, KIFS Trade CapitalGujarat State Fertilizers & Chemicals
Gujarat State Fertilizers & Chemicals' (GSFC) Q3 net profit grew multi-fold to Rs 199.6 crore compared to Rs 61.2 crore year-ago. Revenues from operations increased 39.4 percent to Rs 1,537.5 crore from Rs 1,103 crore in the period under review. GSFC expects balance subsidy payment of Rs 700 crore in the next one to two quarters. Melamine plant capex is expected to be commissioned by September this year.
He lists positives like a book value of Rs 166 per share, trailing EPS of Rs 12 and turning debt free after Q4 FY19. The stock is trading at a low valuation and is a buy on dips. The recent budget focussed on agriculture which also added spark to the scrip. A good monsoon could usher robust volumes in Q4 and beyond.PI Industries
New launches in the domestic market and commercialisation of three projects is likely to drive growth. Profits in Q2 were weak but new products are expected to grow and aid revenue in coming quarters.
Agrochemical companies are expected to report a 6-10 percent sales growth in Q4 FY18, but high raw material prices may put pressure on margins. We expect 15-20 percent YoY increase in revenue, although margins have reduced slightly. The company also maintains a decent order book.VST Tillers:
The company sold a total 7,399 units in March against 6,023 units in the same period last year, a growth of 23 percent. It sold 1,808 tractors in March versus 1,398 YoY, a jump of 29.3 percent. Power tiller volumes were up 21 percent at 5,591 units as compared to 4,625 units in March 2017. The company has started commercial production at its new power tiller plant at Malur, Karnataka which will add to revenue.
Analyst: D K Aggarwal, Chairman, and MD, SMC Investments & AdvisorsHavells India
The company has been continuously growing in each business parameter and is expected to directly benefit from the government's 'housing and power for all' initiative. It is best placed to attain scale across businesses, with its new SBU (Strategic Business Unit) structure and focused product-wise branding strategy. It has pioneered the concept of an exclusive brand showroom in the electrical industry with ‘Havells Galaxy’. It became the first fast moving electrical goods company to offer doorstep service via its initiative ‘Havells Connect’.Manappuram Finance
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.Swaraj Engines
The management expects positive demand growth for tractors and higher market share due to the government’s continued thrust on the agri and rural sector. The central government has time and again reiterated its aim to double farm income by 2022 through better productivity and enhanced farm realisations. SEL is a leading supplier of tractor engines to market leader Mahindra & Mahindra (M&M). The company is one of the key players to benefit from this transition.
CLSA is of the view that a normal monsoon is likely to aid rural recovery. The global investment bank expects rural wage growth to pick up. It lists ITC, Emami, M&M, Godrej Consumer and Ramco Cements as key beneficiaries of a normal monsoon.ITC
Credit Suisse maintains a neutral stance on ITC with a target price of Rs 320 per share. It said that the Union Budget is still relevant for the company post the implementation of the Goods & Services Tax. The brokerage said the risk-reward is favourable at the margin, with valuations attractive relative to peers.M&M
CLSA has maintained its Buy call on M&M and raised its target price to Rs 960 per share from Rs 910 earlier. Its rural demand outlook improved with the normal monsoon forecast. A likely hike in government support prices for agri commodities is a positive for the stock. Launch of the new MPV should also boost utility vehicle segment volumes.Excel Industries
Firstcall Research maintains an Overweight rating on Excel Industries with a target price of Rs 874 per share. 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.UPL and Rallis India
A robust monsoon and expected hikes in the minimum support rates are likely to usher improved expectations for 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. Elara Capital is bullish on UPL and Rallis India in the agrochemical space.Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.