La Niña boost possible for rural stocks

Companies with non-urban focus saw strong performance in earlier three La Niña years

Companies with a rural focus are likely to outperform the market this year on account of the La Niña weather phenomenon which causes higher than normal rain.

After two years of El Niño, a  climate phenomenon and responsible for deficient rain, leading weather forecasters have issued a La Niña watch for this year.

According to an analysis by Deutsche Equities, rural-interfacing stocks had strong performance in the previous three La Niña years (see table) and the trend is likely this year, too.

“With rising likelihood of La Niña and an empirical record of rural-interfacing stocks performing well, coupled with the government’s renewed focus on rural India, we believe rural-interfacing stocks stand out as key beneficiaries of an increasingly likely normal or above normal monsoon rainfall,” said Abhay Laijawala, managing director and head of research, Deutsche Equities India.

Hero MotoCorp, Mahindra & Mahindra, Dabur, Hindustan Unilever, Bajaj Corp, Shree Cement and UltraTech are some of the stocks identified by Deutsche Equities that could clock strong performance if the rain gods are helpful.

Rural focused stocks had outperformed the market by a huge margin in previous La Niña years. For instance, in 1999-2000, 2007-08 and 2010-11, identified as La Niña years, Dabur gave returns of 26 per cent, 17 per cent and 21 per cent, respectively, as against Sensex returns of eight per cent, 12 per cent and 20 per cent for the corresponding years.

The average annual rainfall for these La Niña years was 5.3 per cent above the long period average and the occurrence beneficial to the economy on the whole. “It led to bountiful rainfall and large above average increases in agricultural GDP (gross domestic product) growth rates, which have translated into above average GDP growth rates as well,” said Laijawala.

He says most of the outperformance of the rural-focused stocks in the past was in the first half of the financial year, April to September.

Some stocks might have already started pricing in the La Niña impact. Fertiliser stocks have risen about 10 per cent since April 1 as against a two per cent gain on the Sensex.

Analysts at Axis Capital also say good rain this year could be a dose of good luck. “An above normal monsoon could lead to overall GVA (gross added value) growth being higher by about 20 basis points in FY17,” said Sachchidanand Shukla, senior vice-president.

Beside the probability of a good monsoon, the increased focus of the government on the rural sector can provide a needed boost to these stocks. The finance minister in his Union Budget FY17 has laid greater emphasis on the rural economy. “The government’s renewed focus here should compound the benefits,” said Laijawala.

However, not everyone is so optimistic. Goes a report by Kotak Institutional Equities, “The rural economy will take time to repair after two years of drought. Valuations of consumer staple stocks are quite rich and those of other ‘rural’ plays have become expensive after the recent run-up in stock prices.”