Monsoon forecast: Looking at bumper returns

After the monetary policy, the markets were keenly awaiting the monsoon forecast of the India Meterological Department (IMD) to gauge the impact on food prices and on companies dependent on the agricultural sector.

The IMD dispelled fears by forecasting a normal monsoon for June-September. Rainfall is expected to be 98 per cent of the long period average (LPA), significantly higher compared to last year’s 77 per cent LPA.

A normal monsoon is good news as it helps bring down prices of agricultural commodities and eases cost pressures for companies which use these as feedstock. “It is quite possible that under a normal monsoon, food inflation declines significantly to more than offset the hit from non-food categories,” says economist Rajeev Malik of Macquarie Research.
 

RAIN GAIN A normal year
Monsoon  (% LPA) Jun-Sept	IMD April Forecast	Actual Rainfall	Deviation in rainfall
2004	100	91	-9
2005	98	99	1
2006	93	95	2
2007	95	105	10
2008	99	98	-1
2009	96	77	-19
2010	98	NA	NA
Source: IMD and Edelweiss Research,  LPA is long period average

A poor monsoon, on the other hand, pushes up agricultural prices due to dwindling food stocks. Last year’s rainfall deficit saw the country’s foodgrain production dip to 216.85 million tonnes (mt) in 2009-10 as compared to 233.9 mt in 2008-09. This meant agricultural growth declined 0.2 per cent in 2009-10 from 1.6 per cent in 2008-09. Agricultural growth was a robust 4.7 per cent in 2007-08, when the country saw a normal monsoon.

Improved outlook
For India, the monsoon is critical as a large part of the arable land is dependent on rain. Kharif crops, which account for 55-60 per cent of the country’s foodgrain production, are sown in June and July. Adequate rain, in terms of volumes and coverage (area-wise), is critical during this period.

“Historically, it is observed that after a drought year, we have normal monsoon. So, this year, there is fair chance of a better monsoon. While last year, the industry took a hit, the outlook for the current financial year should improve,” says Rahul Mirchandani, executive director, Aries Agro.

Aries Agro, which makes nutrient-based fertilisers that help improve crop yields, is looking at 25 per cent growth in turnover in 2010-11 to Rs 175 crore. “We are expecting strong volume growth in fertilisers this year as compared to single-digit growth registered by the sector last year,” says Sangeeta Tripathi, who tracks the fertiliser sector at Sharekhan.
 

Improving prospects
In Rs crore	PE (x)	Net  sales	%  Chng	Net  profit	% Chng
Coromandel Inter.	10.5	6395	-32	468	-6
Deepak Fert	6.1	1279	-8	168	19
M & M	15.6	16792	33	1936	189
Rallis India	18.3	875	5	101	42
Tata Chemicals*	10.9	8918	-26	761	-31
Monsanto India	41.7	388	-10	36	-68
R C F	22.5	6,154	-21	205	-8
Chambal Fert.	9.5	3,693	-15	284	71
Aries Agro	13.0	140	27	12	NA
Excel Crop Care	7.0	588	-12	36	39
Advanta India*	40.0	651	17	25	48
Kaveri Seed	14.2	168	44	29	39
The data is for trailing four quarters Source: Capitaline, % change is for corresponding period, * Consolidated

“A normal monsoon means the demand will be higher and the payment cycle will improve, which will be marginally positive for fertiliser companies. We recommend a buy for Chambal Fertilisers and Coromandel International,” says Prakash Gaurav Goel, an analyst at ICICI Securities. Companies like Coromondel Fertilisers generate almost 90 per cent of their revenues from the fertiliser segment. Deepak Fertilisers, which is largely into the chemical business, has a marginal exposure to fertilisers. Tata Chemicals and Chambal Fer