Monsoon Melody

The much-awaited VIP has arrived in India. Like the other VIPs, this VIP also creates traffic jams, changes the train or flight schedules and irritates the common man. But unlike the way we hate the arrival of the other VIPs, this one’s arrival is looked forward to, most of the times with anxiety. No one curses this VIP. Rather, in 2010 the wait to see this VIP was so strong that every moment seemed like a decade. But the VIP has arrived and has already made its mark. Any guesses about who this VIP actually is? We are referring of course to the Great Indian Monsoon. Yes, rainfall has finally descended all over India and the good news is that what was touted to be a 17 per cent deficit in rainfall till the third week of July has now managed to cut down the deficit to just 9 per cent. The heavy showers indeed have been a blessing. The recent Indian Meteorological Department (IMD) data as on July 25, 2010 shows that since June 1, 2010 till date all of India’s weighted rainfall stood at 363.30 mm as against the normal average of 398.40 mm. The best part is that out of the 36 regions categorised by the IMD, 27 have witnessed normal rainfall (See table ‘IMD Data’). Normal rainfall in technical terms is plus or minus 19 per cent as compared to the normal average.

This has brought smiles back to the faces of not only the investors but also the common man not attracted by the stock markets. There is a reason behind that. With India witnessing deficient rains in FY2010 (77 per cent of the long period average) there were many after-effects of the same. India’s farm output had suffered because of the drought.[PAGE BREAK] 

Due to supply constraints food inflation touched a high of 19.95 per cent. Even some of the power and chemical plants had to stop production due to the scarcity of water. The impact of lower growth in the agriculture sector (0.2 per cent in FY10) which contributes 17 per cent to GDP and employs 60 per cent of the population impacted the overall GDP growth of India. Even the Planning Commission stated that to achieve double digit growth more contribution is needed from the farm sector.

With normal rains this year, there are hopes about a better harvest. Further, the increase in rainfall is expected to boost the water level in India’s main reservoirs, which are important for irrigation and power generation. So while there will be an expected decline in food inflation, a decline in WPI inflation is also quite a possibility. We are of the opinion that if this happens the RBI will surely consider this factor while taking policy actions. However, while the investor community is interested in the central bank’s stance, they will be more than interested in knowing “what stocks to buy this season”. Going ahead, we have discussed some of the sectors that can be considerd for investments in the monsoon.

The first on the list is the fertiliser sector. The arrival of the monsoon marks the beginning of the sowing season for a majority of the crops and that is the time when fertilisers are required. So naturally a normal monsoon means that the dispatch of fertilisers would get a boost. Apart from the monsoon, two more factors favour the sector – the government contemplating deregulation in urea pricing and secondly, the shift from costly fuels to gas.[PAGE BREAK]

Another monsoon sector favored by the market is the one dominated by the pure agriculture companies or seed companies. With the demand for seeds expected to soar for sowing, the seeds companies will be strong on the radar.
Then there are the pure agro stocks like cotton, soya bean and even wheat. With a normal monsoon, the farm output of these commodities is expected to go up, which in turn means a rich harvest for the year. Additionally, the agrochemical and agro pesticide making companies also stand to benefit. While these are the direct beneficiaries of the monsoon there are certain indirect beneficiaries. First is the FMCG sector. The equation is very simple - when the rainfall is normal, the crop is bountiful and when that happens, the farmer gets more money and when he has more money, he buys more. A good monsoon gives impetus to rural buying. And with strong rural reach and penetration, the FMCG companies are expected to witness better volumes. Not only this, the plans for buying a tractor or installing drip irrigation that a farmer may have put on hold last year will now be realised.

Another sector is that of two-wheelers which has a high co-relation with the monsoon. Just to quantify, Hero Honda, which holds a 59 per cent share in the domestic two-wheelers market, gets half of the revenues from its rural markets. So the higher disposable income is also expected to drive sales of the two-wheeler companies. Therefore a lot of pent-up demand is expected from rural India, putting wind in the sails of FMCG and auto companies.

The buying of cars is not as directly attributed to rural India but the recent figures show that rural demand has been on the rise. In numbers, Maruti Suzuki, which sells every second car in India, earned only 8 per cent revenues from the rural markets in FY09 which increased to 17 per cent in FY10. Going ahead, Maruti wants to expand the same to 20 per cent. Banks too are expected to benefit as farmers might go in for more credit, especially those with very good rural reach like the PSU banks. Further, if the monsoon really turns out to be perfect, the recovery of the banks will be good too. Frankly speaking, a good monsoon means everything falls in place and points to a good year ahead. With water being a life-giver, the Indian economy will be rejuvenated too.