5 Sectors and 6 Stocks That Will Flourish After a Flush Indian Monsoon

Published on 22 Jun, 2016

Indian Stock Market

India's expecting more rain than it'll need this year, a welcome respite after two years of shortfall. While cloudy skies don't impact the Indian stock market significantly, they're definitely good news for some of the country's agri sectors that have been too long in the gloom.

The monsoons have finally arrived in India, moving further inland after having touched its southern states. After two years of deficit rainfall, the monsoons in 2016 are expected to remain 106% of the Long Period Average (LPA) with a deviation of above or below 5.0%, as per the estimates issued by the India Meteorological Department (IMD).

Category
Rainfall Range (% of LPA)
Forecast Probability (%)
Climatological Probability (%)
Deficient <90 1 16
Below Normal 90 – 96 5 17
Normal 96 – 104 30 33
Above Normal 104 – 110 34 16
Excess >110 30 17

Source: India Meteorological Department


The Above Normal monsoon expected is wonderful news for India’s farmers, over 70% of whom rely directly on the rain for irrigation.

While 2015 was an El Nino year that resulted in weak monsoons and droughts in several regions of the country, 2016 is expected to be the opposite — a La Nina year— and bring bumper harvests due to better rainfall.

The chart below shows food grain production versus rainfall for the last ten years in India:

Food Grain Production versus Rainfall in India

Source: India Meteorological Department and Ministry of Agriculture & Farmers Welfare
Note: Normal rainfall/LPA is the 50-year (1951-2000) monsoon season average of 89 cms (35 inches)


It’s no secret that agriculture is a big part of the Indian economy; 2015’s CIA Factbook figures pegged the sector’s influence at 16.1% of India’s GDP.

The likelihood of good monsoons has renewed hope for stable food prices and lower inflationary pressures in the country, allowing the Central Bank of India to reduce its benchmark lending rate.


Trading in the Rain — Monsoons and the Indian Stock Market

While there’s no doubt that the monsoons impact movements in the Indian stock market, there are several other factors in play as well. Local political and economic factors in addition to global variables have a stronger impact on fluctuations in India’s markets.

An analysis of stock market returns from the past decade demonstrates that there’s no direct or binding relationship between the monsoons and market fluctuations in India. There have been years when the market generated good annual returns despite deficit or below average monsoons, and vice versa.

Index Returns versus Rainfall in India

Source: CAPIQ, NSEI | *As of June 14, 2016


The Monsoon’s Impact on Key Indian Sectors

A good monsoon in India inevitably boosts its economy, and subsequently, the purchasing power of Indian consumers. Some of these sectors are listed below:


Agri-inputs

Although agriculture and allied sectors such as fertilizers and agrochemicals have been negatively impacted due to two years of weak monsoons, the push for 2016’s bumper harvests is bound to boost demand in the agri-input sector.


Automobiles

Rural and semi-urban India are huge markets for India’s automotive sector, and a good monsoon will have a direct bearing on the purchasing power of these customers. The tractor and two-wheeler segments have been sluggish over the last two years due to several factors, including weak rural demand and low minimum support price (MSP) for farm products.

The industry is expecting a surge in sales, with demand likely to rise in tandem with rural affluence after reaping the benefits of a good monsoon.


Fast Moving Consumer Goods (FMCG)

Indian companies in this space count on rural India for nearly 35% of their total revenues.

Although falling commodity prices have driven down input costs in this sector, the quality of monsoons also impacts these companies’ annual performance.


Public Sector Banks

The monsoon winds are a breath fresh air for public sector banks that have been grappling with agricultural non-performing assets (NPAs). They can now expect to collect on debts that the government waived in order to help farmers cope with the below average monsoons of the last two years.


Power Sector

Low water levels at hydroelectric dams were detrimental to the generation of electricity, causing a number of power cuts in the country every year when the monsoons are weak.

Not only could healthy monsoons boost power production, they could in fact reduce its consumption as well, as the cool monsoon climes reduce the necessity for air-conditioning during India’s hot and humid months of May-June-July.


The Monsoon’s Impact on Key Indian Stocks

Companies in agri-based sectors are counting on this year’s monsoon to offset some of the deficits they’ve suffered over the last two years.

They’re hoping that the heavy rains encourage growth in India’s agricultural sectors, boosting demand for fertilizers, tractors, chemicals and pesticides.

Here’s our pick of a few leading firms in this space that are positive they’ll reap the benefits of a good harvest.


Dhanuka Agritech Ltd.

With plans to launch two molecules — Maxsoy (a soya bean herbicide) and Conika (a fungicide for various crops, fruits, vegetables and pulses) — this year, Dhanuka Agritech expects a 20% growth in revenue in the current fiscal. It’s sure to sustain its margins and expects it to grow it by a few basis points (bps).


PI Industries

With plans to introduce 2-3 products , both for domestic as well as international markets, PI’s outlook looks positive this year.


Insecticides India Ltd.

Hoping for a bull run as demand picks up and distributors build inventory, Insecticides India Ltd is optimistic about a 20-25% growth in revenue over FY17.


Mahindra & Mahindra Ltd.

Having reported sustained momentum in tractor sales during May this year, Mahindra expects demand to grow, with increase in agri income due to a good monsoon, advance estimate of Rabi crop production, and a rise in minimum support price (MSP).


VST Tillers

Optimism fueled by government subsidies and other benefits for irrigation and mechanization.


Hero MotoCorp

With nearly 45% of the company’s total sales derived from rural India, Hero MotorCorp Expects good business from rural markets if the monsoons are good. After nearly two years of sluggish growth, the company is optimistic about selling 12 million units this year.


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