Even as the rainfall is currently projected to fall short of normal levels, the situation will be clearer over the next 4-6 weeks

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When the Indian Metrological Department (IMD) forecasted that the monsoon this year will be “below normal,” people were worried. From the agriculture perspective, monsoon is critical considering that a large part of the arable land (available for farming) is dependent on rains or does not have access to irrigation infrastructure for growing crops. The crop for Kharif season, which accounts for 55-60 per cent of the country’s food-grain production, is mostly sown in during June and July. Thus, adequate rains, in terms of volumes and its coverage (area-wise), are very crucial during these periods.

Initially, the monsoon progress was not encouraging. To begin with, on June 10 2009, the IMD indicated that the shortfall in rains was 44.1 per cent as compared to its long period average (LPA). A fortnight late, the deficit was pegged at 54 per cent due to the delay in monsoon. Little wonder, that by that time, industry watchers were concerned. “Based on the past trend, it appears that if the actual rainfall is seven per cent below normal (as per IMD forecasts), the Kharif food-grain output could see a decline on a year-on-year basis (y-o-y). The risk of downward revision in our agriculture growth estimates to 1.5-2 per cent y-o-y from the current 3 per cent y-o-y has clearly increased,” wrote Chetan Ahya, economist, Morgan Stanley, in a note on the monsoon.

“There are surely some concerns due to the delays in monsoon as we have seen some losses in oil seed crops. And, if the monsoon fails, the agriculture production will be hampered and there would be a large impact on the rural demand and food prices," says Yashika Singh, economist, Dun & Bradstreet.

Will the tide change?
The IMD's last update of July 3 however, shows a marginal improvement in the monsoon progress. The IMD says that the southwest monsoon had advanced over many parts of northwest India by June 30 while the remaining parts were covered by July 3. Thus, the monsoon has covered the entire country about 12 days ahead of its normal schedule. The key element is IMD’s analysis which indicates that the till-date short fall in rainfall in the country still remains a high 43 per cent.

Analysts are worried that the short fall is significant, which may not be recouped in the subsequent days. “We are definitely lagging behind. Few showers in some regions have just improved the sentiments, but nothing much has happened and the latest figures of IMD are already showing this. The deficit is going to be there this year and could impact the crops as well,” says Navin Mathur, associate director, currency and commodities, Angel Broking.

The problem is compounded when analysts look at the situation from the context of current water reserves. According to recent Central Water Commission data, the water reserves across the country was 14.2 billion cubic metres, which is just 9 per cent of full capacity as compared to last year's reserves levels of 21 per cent.

Although there are concerns, experts also believe that it may be a little early to draw any conclusions. “It is too early to predict for the rest of the season because it will all depend on how the monsoon flows not only in terms of quantity but in terms of coverage as well,” says Singh.

Going by history, there have been delays in monsoon in the first few weeks in the past, which gets subsequently recouped in following weeks as the monsoon progresses. Besides, since the rainfall in the June month accounts for about 19-20 per cent and the remaining is contributed in the months of July and August, farmers are also typically familiar with minor changes in crop sowing timing.

The potential impact
Nevertheless, the progress of monsoon is critical for the next few weeks, especially in the light of the fact that over 60 per cent of India’s population resides in the rural region. Estimates suggest about 46 per cent of rural India’s income accrues from farming activity, which might get impacted if the rainfall is visibly below normal. This could also have a ripple effect on sectors and companies, which cater to rural demand.

Direct plays
The biggest impact could be on companies which provide agriculture inputs like fertiliser, seeds and pesticides. “So far, the damage is not apparent however, farmers are waiting for a clear signal on the monsoon. If it is delayed, then farmers might have to delay their first sowing or re-sow their crops or might shift to the shorter duration crops. In such a situation, the seed companies might face problems relating to payment collection, and inventory and cash management,” says Rahul Mirchandani, executive director, Aries Agro.

In this scenario, some companies might end up reporting their sales in September quarter as against the June quarter. “The problems could be there for the fertiliser sector, since there is a very high correlation between its prospects and the monsoon. But, a lot will also depend on the progress of the monsoon and the business mix of individual companies,” says Satish Mishra, analyst, Pinc Research.

For instance, in the case of Deepak Fertilisers, the company generates 60 per cent of its revenues from the chemical business and the rest of its sales are divided into two seasons, then any likely impact would be on the 20 per cent of its sales (net impact could be minimal). Likewise, companies like Tata Chemicals and Chambal Fertilisers are among the most diversified players. But, analysts believe that companies like Coromondel Fertilisers, which has about 90 per cent exposure to the fertiliser segment, might feel a higher impact.

Within the agriculture input business, Jain Irrigation is a major player, which supplies micro irrigation systems to farmers. “The impact of an adverse monsoon will definitely have some bearing on Jain Irrigation, but only to some extent, as its systems are mostly used in non-rain-fed areas or for drawing water from wells and canals. Also, as expected if there are positive announcements for the agriculture sector (micro irrigation systems, etc) in the Union Budget, it will be positive for the company,” says Suman Memani, analyst, Religare Hichens. 

Ripple effect
Farm income accounts for about 45 per cent of the total rural income. Hence, any downside in agriculture output could also result in potential impact on farmers’ spending power and thus, rural demand. Here, analysts believe that farmers might not reduce their spending on the necessary articles, but certainly, on some premium segment products as well as capital expenditure on farm equipment.

FMCG is one sector, which has been exploiting the rural consumers aggressively. “If the monsoon is really bad, it will definitely have an impact on FMCG companies in the form of lower consumption. But, not all the companies will get impacted. It would only be companies which are having higher exposure to premium products,” says Hemant Patel, analyst, Enam Securities.

Companies like Colgate, which although have exposure to the rural market, might not get impacted severely since most of its sales accrue from essential products (toothpastes). But, companies like Dabur, which generate about 40 per cent of its revenue from the rural segment, might get impacted as the company has a relatively larger presence in the premium segment like hair care, skin care and home care. And, companies like Nestle, Marico and Godrej Consumers may not have any impact as most of their revenues come from urban markets.

Automobile is another sector, which might get caught due to the decrease in rural demand if farmers postpone new purchases. For instance, during the last drought in 2002-04, overall tractor sales dropped from about 240,000 units in 2001 to about 170,000 units in 2003. Although, so far the situation hasn’t reached the levels of 2002-03, analysts believe that in the event of any adverse scenario companies like Mahindra & Mahindra may feel the impact. Within automobiles, two wheelers companies generate about 50 per cent of their sales from the rural market.
 

Hero Honda, which generates about 60 per cent of its sales from the rural markets of which a majority comes from cash purchases (unlike Bajaj Auto or TVS Motors) is likely to feel the impact. Cement companies are also likely to bear the impact of an adverse situation in the form of farmers postponing some of their housing construction activities.

Overall, within these sectors there are many companies having exposure to the rural market, but investors will need to assess the impact on a case-to-case basis, in terms of the company’s regional presence, product profile and revenue mix. On their part, companies are also expected to take measures, should monsoons play spoilsport, with an aim to offset the potential impact on their fortunes. So, keep a watch on these factors and the progress of monsoons, given that the situation continues to remain fluid.

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