Normal monsoon boost Indian economy; related stocks may gain: Analysts

Analysts consider the south-west monsoon to be the lifeline of India's agri-based economy, as it is likely to brighten outlook for bumper crop output amid inflationary times post covid-19 blowout.

Farm-income related stocks are back on analysts’ radar after the Indian Meteorological Department (IMD) and Skymet forecasted a normal monsoon for India.  While the IMD anticipates average rainfall this monsoon season to be 103 per cent of the long period average (LPA), 4 per cent higher than the April forecast, Skymet expects monsoon to be 'normal' at 98 per cent of the LPA.

The south-west monsoon is considered to be the lifeline of India’s agri-based economy, as it is likely to brighten the outlook for bumper crop output amid reigning inflationary pressures post blowout of covid-19, analysts said.

Those at BofA Securities, for instance, anticipate sluggish rural demand to start bottoming out in the backdrop of a normal monsoon. “We see nominal farm income improve to 17.1 per cent YoY in fiscal 2022-23 (FY23), atop a strong 15.4 per cent YoY increase in FY22. Moreover, channel checks indicate improvement in tractor demand as dealers across the country expect robust farmer spending outlook after they fetch good prices for their crops in the markets,” they wrote in a recent note.

With the rise in farm income, analysts expect the related sectors to see a spurt in demand as consumption levels improve. “We expect rural and agricultural demand to pick-up pace with the onset of the normal monsoon. Sectors like FMCG, tractors and two-wheelers from auto segment, chemical, and fertilizers are likely to witness a decent demand going ahead in the backdrop of a normal monsoon,” said Ajit Mishra, VP – Research, Religare Broking.

Over the past one month, tractor stocks like M&M and Escorts have gained over 12 per cent and 1 per cent, respectively, whereas two-wheeler stocks like Bajaj Auto, Eicher Motors, and TVS Motors gained in the range of 3 per cent to 13 per cent. Select fertilizer stocks too, have sizzled in trade, as shares of  Deepak Fertilizer and Coromandel International gained 3 per cent and 5 per cent, respectively. 

However, shares of agro-chemicals like UPL, Deepak Nitrite, PI Industries, Rallis India, Gujarat Alkalies and Tata Chemicals have bled in the range of 6 per cent to 19 per cent in a month.

In comparison, frontline indices S&P BSE Sensex and Nifty50 shed over 2 per cent each in a month, whereas broader markets like Nifty Smallcap 100 and Nifty Midcap 100 tanked over 5 per cent, during the same period.

Meanwhile, Gaurav Dua, head of research, Sharekhan expects large-cap names like Mahindra and Mahindra (M&M), UPL, and Dabur (India) to benefit most from the arrival of monsoon season.

Word of caution

Though the prediction of a normal monsoon augurs well for the overall health of the economy and can trigger an increase in demand, the distribution of rains across the country is another important factor to consider. That apart, rising input costs due to geopolitical issues can also trigger a rise in input costs despite a healthy monsoon back home, analysts caution.

Global crop prices continued to firm up as prices of corn, cotton were up 11 to 15 per cent, while that of soyabean, wheat, and rice were up in the range of 5 to 7 per cent, month-on-month (MoM) basis in May, data show. Chemical spreads were under pressure too, due to increase in petrochemical prices.

However, analysts expect monsoon-related stocks to gain steam in the near-term despite geo-political tensions. "We expect M&M, Marico, fertilizer stocks like Coromandel Fertilizers, Bayer CropScience, and Chambal Fertilizer to see an upside of 10 to 15 per cent. Though there will be some impact felt in the overall economy due to geopolitical tensions coupled with a rising interest regime, we do not see any near-term impact for monsoon-related stocks, hence recommending investors' to buy or hold on to their investments," said AK Prabhakar, head of research, IDBI Capital.