IMD’s normal monsoon forecast could put life back in agri-linked stocks
In its forecast released today, the India Meteorological Department (IMD) said it expects monsoon rains to hit Kerala coast by May 15 and projected a normal monsoon for the third year in a row. The weather department sees monsoon at 97 per cent of long-term average and is expected to update its forecast by June.
The monsoon forecast is a positive for Street, said marketmen, who believe a host of agri-consumption sectors would make news on Tuesday. The list may include companies from FMCG, farm equipment, consumer durables and two-wheeler players.
"It's a good news. It should mean that agri-commodities will not have inflationary impact, which should augur well for the market as the RBI may not raise interest rates. It would also boost consumption-led demand," said Sanjiv Bhasin of IIFL.
Earlier this month, private forecaster Skymet had said India was expected to receive normal rainfall in the June-September monsoon season this year although parts of southern and northeastern India were at risk of deficient rain.
Bhasin is upbeat on fertiliser and agrochemical stocks such as Chambal Fertilisers, Rallis India and UPL. Analysts noted that dealers have so far kept inventory of fertilisers and pesticides low, which should support volume growth in FY19.
As far as farm equipment sector goes, only 40-45 per cent of agriculture is mechanised in India. And this is where experts see huge potential for higher tractor penetration, and by extension, this is good news for tractor makers, said analysts. M&M is a big listed player in this segment.
Other than this, the monsoon forecast would be taken very positively by companies from FMCG, rural financing and consumer staples, said Mayuresh Joshi, Fund Manager at Angel Broking.
"We are lucky for having two consecutive normal monsoons. If this happens again in the third year, it will be a very strong and positive factor for all rural consumption or two wheeler segments or NBFC companies… because they are more dependent on the rural sector to be on a discretionary spending, where it will have a better delta on earnings," Yogesh Mehta of Motilal Oswal Securities told ET Now.
JM Financial in a note suggested that despite the declining share of farm income in rural India, agriculture continues to be one of the major drivers as farming still employs 50 per cent of the countrys labour force.
"Farm income is of critical importance for any recovery in rural spending. Our recent visits across rural India point to a modest improvement in farm income after the current rabi harvest," it noted.
The brokerage said a likely normal monsoon in 2018, an increase in MSP prices, improvement in crop procurement mechanisms and stable – if not increasing – global agri-commodity prices could support a modest acceleration in farm income growth.
"We should have a healthy monsoon also this year, rural consumption is poised to show a very strong recovery. I think that automobile as a segment and sector in spite of the rich valuations would continue to do well. Ancillary companies should also have good margin expansion because they have had a quarter on quarter pressure on raw material costs, which they have effectively seamlessly passed on because of the pricing power," said Sanchita Mukherji at Blue Edge.
Higher acreage and yield on the back of improved farmers sentiment coupled with recovery in farm income are likely to bolster growth in the agrochemicals business for FY19, Elara Capital said in a note. Emkay Global has a positive view on Deepak Fertilisers and Coromandel in the fertiliser segment. In the agrochemical space, it bets on Insecticides India, PI Industries and UPL.