The India Meteorological department (IMD) has issued a normal monsoon forecast this year which is likely to bring cheers to the Indian economy. IMD in its second stage forecast issued on May 30 predicted 101% rainfall for July and 94% rainfall in August, bringing joy to farmers as these are the most important months for the production of kharif crops.
Earlier, the weather office in its first stage forecast predicted 97% rains of a long period average (LPA), which was revised later to 101% of long period average.
The farm sector accounts for about 18% of India's economy and monsoon is crucial for the farm output as 55% of the fertile land is dependent on the monsoon for water. The normal rain forecast will leave higher income in the hands of farmers which would then create more demand for products in the economy.
Good rains this season will add fodder to the growth engines of various sectors which will spur demand and consumption cycle and improve key growth numbers of the economy.
A normal monsoon will also drive the earnings of corporate India which anticipates a rise in production to meet higher demand for products from rural sector. This would in turn decide the direction of stocks of these firms.
IMD's predictions have a co-relation with the market as markets tend to react whenever the IMD reports its predictions. The below image shows the stock market reaction to IMD's monsoon forecast for the last 6 years.
Here's a look at the stocks that are likely to benefit from a good monsoon:
Ashok Leyland: Rural LCV (light commercial vehicles) demand will remain healthy provided the current interest rates prevail. Even in the worst case scenario, the company stands to grow by 10 to 12% in the rural markets. Ashok Leyland is adding up six new LCV's in its product catalogue. The new products would cater to all segments in between, across electric, diesel and CNG products
Dabur: It is one of the largest FMCG companies in India. Dabur plans to penetrate 60,000 villages (particularly in South India) in near term to capitalize on revival in rural consumption (45% of revenue). Further, new product launches in hair care, fruit drink and ayurvedic segments are likely to support volume growth. It expects GST to be positive for its portfolio.
Rallis India: Rallis India, a member of Tata group and a manufacturer of pesticides, fertilizers and fine chemicals, stands to benefit from the launch of 'Rallis Samrudh Krishi' by improving the quality and yield of the crops.
Swaraj Engines (SEL): It is into manufacturing and supplying of diesel engines for tractors in the range of 22 HP to above 54 HP. The company is equipped with highly productive & precise quality analyzing machines. It is also manufacturing hi-tech engine components.Till date SEL has supplied over 7,00,000 engines for fitment into Swaraj tractors.
Mannapuram Finance: It has its core offerings in gold loans but they also cater to MSME loans, vehicle finance, microfinance, home loans which should witness a spike in demand in the near future specially in the rural areas.
Hero MotoCorp: It nearly derives half of its total revenue from rural India. The total volume growth in motorcycle was 13% yoy, and in two-wheeler (2W) was 11% yoy in Q2 FY18. A satisfactory monsoon, government's push to double farm incomes and rising urban incomes are strong triggers that will aid volume growth for the company.
M&M (Mahindra and Mahindra Limited): The company has exposure in the rural market among the key auto original equipment manufacturer (OEMs) & tractors making it the best bet on rural market recovery due to good consecutive monsoons and loan waivers across states.
DHFl (Dewan Housing Finance Corp. Ltd.): It is a deposit-taking housing finance company, DHFL was established to enable access to affordable housing finance to the lower and middle income groups in semi-urban and rural parts of India. With the rising incomes and favourable government policy, housing demand is expected to rise.
Coromandel International: This company is in the business of fertilizers, pesticides and specialty nutrients. The company stands to benefit in the rural retail business.