Will It Rain Profits?

We discuss prospects of companies that are expected to gain from a good monsoon
Tanvi Varma/Money Today        Print Edition: September 2013
Companies that are expected to gain from good monsoon
PHOTO: Reuters

Monsoon seems to be the only respite that Indian companies can look forward to this year. Falling rupee, high fiscal deficit , flight of foreign funds and poor earnings, these have been the only themes in the India story for many quarters now. However, a good monsoon might bring good tidings, at least for some companies.

A monsoon is called normal when rains are 96-104% of the long-period (50 years) average, or LPA, of 89 cm between June and September. This year, the first half, that is, June and July, has been satisfactory (17% over LPA). The India Meteorological Department has predicted a normal second half as well.


Above normal rains have led to 18% higher sowing of kharif crops so far, says Dipankar Mitra, senior vice president, research, Motilal Oswal Securities.

Although deficient rainfall in east India has slowed rice sowing a bit, the crop has been planted over 7% more area compared to the corresponding period last year. While the crucial sowing months are July and August, sowing across the country has already exceeded 70% of the total acreage last year.

"Monsoon has a direct impact on kharif output; thus, agriculture growth is expected to double to 3.9% in 2013-14 from 1.9% in 2012-13," says Mitra.

A good monsoon creates positive perception about the economy among investors, including foreign institutional investors, as a large part of India depends upon agriculture for sustenance.

"Also, India's economy is known to be driven by domestic consumption, which will get a big boost as rural incomes rise due to a good monsoon," says P Phani Sekhar, fund manager, portfolio management services, Angel Broking.

Although the farm sector's contribution to the country's gross domestic product has fallen from 19% in 2004-05 to 12% in 2013, it still employs half of India's population.

"Also, agriculture has strong links with industrial and services sectors, plus a direct bearing on rural economy and consumption," says Mitra.

"Not only does a good monsoon increase farm production, giving more money to farmers, it also keeps inflation in check by increasing the supply of food articles," says Dipen Shah, head, Private Client Group Research, Kotak Securities.

A fall in inflation means higher possibility of lower interest rates, which is generally supportive of industrial growth.

In fact, we have seen that sustained farm sector growth over the last five years has lowered debt levels in rural India and created job opportunities outside the farm sector. This, plus a plethora of farmer-friendly social sector schemes, is expected to increase consumption in rural areas this year as well.


There are quite a few industries that will see a rise in demand for their products and services because of this mini rural boom. Shah of Kotak says a good monsoon will benefit fast moving consumer goods companies as rural India's higher purchasing power increases the demand for their products. "Companies with wide rural footprint such as Hindustan Unilever, Dabur and Godrej Consumer Products will benefit the most," he says.

High farm production will also lower raw material costs for companies that make packaged foods, for instance, Britannia, GSK Consumer, ITC and Nestle. "Having said that, we don't expect an explosion in demand in this space. For instance, HUL's volume growth will perhaps rise from 4-6% to 6-7% leading up to the general elections next year," says Sekhar. Investors should not expect phenomenal returns from this sector considering the high valuations, he says. The sector is up 138% since 2008 while earnings have risen 75% compared to 70% growth for the market as a whole.

Data show a close link between rains and fortunes of FMCG companies. For instance, in 2009-10, the average rainfall was 22% below the LPA. HUL's sales fell 13% during the year. In 2007-08, rainfall was 6% above the LPA. As a result, HUL's sales rose 17.6%. Similarly, normal rainfall helped HUL grow sales by 12.1% in 2011-12.

"Also, during years of good monsoon , the demand for two-wheelers and low-cost four-wheelers and tractors also rises. This is expected this year as well," says Shah of Kotak.

Analysts expect M&M to grow tractor sales by 25%. The improvement in consumer sentiment in rural areas will benefit two-wheeler companies as well. However, there are chances that this may be offset by low demand in urban India due to the industrial slowdown there.

Further, if the current liquidity tightness continues and growth in bank deposits slows, lending rates may start rising, impacting demand.

Experts say that besides these, there are some sectors, for instance fertiliser and irrigation, which seem direct beneficiaries of a good monsoon but are facing a lot of other problems.

A normal monsoon usually increases the demand for fertilisers. This explains the rise in stocks of fertiliser companies Coromandel International, Chambal Fertilisers & Chemicals, Deepak Fertilisers and Rashtriya Chemicals & Fertilizers in the last one month. However, for this rally to sustain, earnings have to grow, which may not occur.

Sekhar of Angel Broking says lack of clarity on supply of gas to fertiliser companies and higher prices of gas and other inputs have led to a sharp rise in prices of decontrolled fertilisers in the domestic market. Due to this, companies are burdened with huge inventories. This has also led to an increase in consumption of subsidised urea. Hence, the performance of fertiliser companies may not improve substantially till the second half of the current financial year. Also, the large inventories of complex fertilisers may take time for liquidation and sales may remain sluggish in the medium term, he says.

Irrigation is another area which should do well. However, it comes under the infrastructure category and depends upon money provided by state governments. Although a large number of states are going to polls, which means governments may dole out benefits for farmers, the fiscal deficit situation is so bad that there may be no big bonanza on this front this year, says Sekhar.

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