The drought-like situation will severely impact several sectors such as fastmoving consumer goods (FMCG), automobile, banking and fertiliser whose stocks could take a beating in the coming months, according to analysts.
Industries and sectors linked to agriculture will be affected as income of farmers will be reduced substantially. While lower consumption will hit FMCG, fertiliser, two-wheeler and tractor sales, loan default by farmers will hammer the balance sheet of banks. The demand for heavy commercial vehicles, cars and utility vehicles will also be affected.
"The FMCG sector will be the worst affected because it has the best performance so far. Rural demand will be affected as farmers will curtail purchases due to lack of income," said Ambareesh Baliga, chief operating officer, Way2Wealth Brokers.
Baliga added that the automobile sector has been suffering due to lack of demand and its problems are going to compound with the drought-like situation. Sale of two-wheelers and tractors in rural areas will be affected. Mahindra & Mahindra, the biggest player in the tractor segment, refused to comment.
As the Reserve Bank of India (RBI) on Monday revised GDP forecast to 6.5 per cent due to the drought-like situation, banks are concerned about the growing level of non-performing assets. "The banking sector will take a hit as farmers may not pay back loans. As inflation will remain high, interest rates will not be reduced, which will affect the sector. The fertiliser sector will suffer and stocks of all affected industries will be revised downwards," Baliga further added.
"The FMCG sector will be hard hit because 76 per cent of the top line comes from rural areas. Currently, FMCG stocks are overvalued and with the drought-like situation, stocks will be corrected by 25 per cent," said Kishor Ostwal, chairman and managing director, CNI Research.
The nervousness is evident. On Monday, when the Sensex rose 304 points, or 1.81 per cent, to close at 17,143.68, FMCG sectoral indices was up 1.16 per cent while auto was up 2.26 per cent. Consumer durables was up 2.53 per cent and Bankex 2.67 per cent against 3.58 per cent growth witnessed in power indices.
"With the lowering of the GDP forecast, the asset quality of banks has been affected. All sectors linked to agriculture will be affected. But it is too early to assess the impact and write an obituary... Rains may arrive reversing the situation," said Rajesh Mokashi, deputy managing director, CARE Rating.
If the present situation continues, the drop in production will result in rise in prices of essential commodities and further shrink in demand will make economic recovery a distant reality. "The impact will be less if the government implements the Public Distribution System effectively and food stored with the government reaches the actual consumers," said Ostwal.
Courtesy: Mail Today