Rural themes to get a monsoon boost

Consumer, auto, financing and agri-input segments will be biggest beneficiaries

Listed rural plays were among the highest gainers on the bourses after the Indian Meteorological Department (IMD) and Skymet, a private weather forecaster, predicted an above normal monsoon for 2016. The positive sentiments that followed the news is understandable given that monsoon was below normal in the previous two years, and the fact that a good monsoon can boost the rural economy thereby pushing up India's GDP further.

Though agriculture’s contribution to the GDP is shrinking (17 per cent now) given that over half of the population is dependent on agriculture, a normal monsoon has an outsized impact on rural wages and spending.

Analysts at Phillip Capital say that if FY17 follows a pattern similar to FY11 (FY09-FY10 drought), the rural economy could witness a major bounce back. Thus, if past records are anything to go by, agricultural growth after a couple of deficient monsoons tend to (on a low base) grow upwards of eight per cent and this could be the number likely to be achieved in FY17 after the agri sector grew at one per cent in FY16.

What will aid this is the 17 per cent increase in the FY17 Budget for expenditure on rural development. Any increase in minimum support prices to be announced closer to monsoon arrival, as well an improvement in crop, yields, will be the biggest drivers of rural growth.

The sectors which benefited the most in FY11 will also come into play if FY17 turns out a bumper year for agriculture. Six years ago, a normal monsoon (after two years of deficient rainfall) saw two-wheeler sales grow 26 per cent, tractor sales were up 20 per cent, rural sales of FMCG companies were almost double of urban sales and ad revenue growth for print media was at 20 per cent. Within the auto space, in addition to tractors and two wheelers, cars (Maruti) and utility vehicles (M&M) could see high demand.  

Analysts thus predict that the biggest beneficiaries will be rural discretionary expenditure and staples. Says Abneesh Roy, FMCG analyst, Edelweiss Securities, “All FMCG companies stand to gain from a good monsoon. However, rural India contributes 40-50 per cent to the overall revenues of Hindustan Unilever, Dabur, Emami, and Colgate as against 25-30 per cent for other companies. These four companies, thus could benefit relatively more than the others.”

While the increase in rural consumption, according to HDFC Securities, will augur well for FMCG, consumer goods, autos and financial products, sales of companies in the agri inputs (seeds, pesticides) and agri equipment (tractors, tillers) will see higher demand before the onset of the monsoons. While it is too early to say but sales of Escorts and M&M tractors have already seen an appreciable jump in recent months. This also means better days ahead for rural financiers. Says Nitin Kumar who tracks financials at Prabhudas Lilladher, “Most retail-facing NBFCs such as Mahindra & Mahindra Financial Services (MMFS), Shriram Transport, Shriram City Union, Cholamandalam Investment and Finance will benefit from a strong monsoon. Amongst banks, HDFC Bank, City Union Bank and Federal Bank have a higher rural presence and will benefit. However, the actual gains will be a function of pick up in overall credit growth for the sector.”

Higher discretionary spends will boost business growth of auto finance companies. Says Ramesh Iyer, managing director, Mahindra & Mahindra Financial Services, “It is extremely important to receive an above average monsoon this year, and this is particularly critical for key markets such as Madhya Pradesh, Maharashtra, Uttar Pradesh and Karnataka.”

Tractor sales are closely linked to the sentiments in rural economy. For two consecutive years, tractor sales have shrunk due to below normal rainfall. “Tractor is a sentiment based industry and with the forecast of good monsoon this year and the focus on the farm sector by the central government, we are confident that the sector would grow by 10 per cent in 2016,” Harish Chavan, chief operating officer at Mahindra Farm Division said last week.

“We are contemplating the option of increasing our ad and promotional expenses for the rural markets. Currently, we are strengthening our distribution in tier II and III towns which will help festive season supply”, Kanwal Jeet Jawa, managing director, Daikin Airconditioning India said. He expects Daikin volumes to grow 18 per cent.

However, there is a big downside risk as well. Experts say investors should be cautious and await more clarity before committing their money to themes that will benefit from the rural growth story. That’s because, while the chances of a normal monsoon are very high given that India has not had three consecutive bad monsoon years in over 150 years, monsoon forecasters mentioned at the start of the article have also gone wrong in some of their earlier predictions.

(With inputs from Arnab Dutta, Ajay Modi in New Delhi, Sheetal Agrawal & Hamsini Karthik in Mumbai)