A difficult year: El Niño concerns trigger earnings risk for India Inc

India's southwest monsoon from June 1 to June 23 has been almost 43% below normal, among its worst performances in the last several years

Worries about a possible strong El Niño effect on monsoon showers this year is making boardrooms grow uneasy with industry executives and economists warning that weaker rural incomes and discretionary spending in coming months could depress corporate earnings.

 

Producers of tractors and entry-level two-wheelers — sectors dependent on farm income, said that although sales took off strongly in the initial months of the current financial year (FY27), they may end the year with modest gains.

 

Fast moving consumer goods (FMCG) companies are keeping their fingers crossed as the sale of premium personal care, packaged snacks, hot beverages and home improvement purchases are likely to take a beating.

 

However, biscuits major Parle Products expects sale of food articles to dodge a drastic hit as these are essential items.

 

A severe El Niño can wipe out as much as 1.5-2 percentage points from agricultural output growth and pose a downside risk of 35 basis points (bps) to overall real GDP growth rate, said Madhavankutty G, chief economist at Canara Bank.

 

El Niño effect is characterised by the disruption of monsoon in India due to the warming of oceanic surface temperatures in the Pacific that interferes with the pattern of rain carrying winds to the country, leading to lower than expected rainfall.

 

Rural consumption is likely to be impacted adversely, even though the government’s foodgrain buffer stock is likely to limit the distress, experts said.

 

A senior Bajaj Auto Ltd executive, who did not wish to be named, told Business Standard on Monday that whenever monsoon is weak, demand in the entry-level two-wheeler segment tends to soften. The observation broadly aligns with rating agencies’ views that lower-income rural consumers are more likely to defer discretionary purchases when farm incomes come under pressure.

 

Rating agencies and industry executives are tracking kharif sowing activity, farm incomes and rainfall distribution for clues on whether rural purchasing power can sustain the momentum seen at the start of FY27. India’s southwest monsoon from June 1 to June 23 has been almost 43 per cent below normal, among its worst performances in the last several years.

 

Consumer goods

 

FMCG companies expect consumption to take a hit this year on account of deficient rainfall. The real impact of lower monsoon is expected to be clearly visible from the October-December quarter, companies said. They are calling it out as a difficult year for consumption growth.

 

“We will see a difficult year for consumption as El Niño is expected to be severe this year and with that, water consuming industries will also take a hit,” said Angshu Mallick, executive deputy chairman at AWL Agri. “In Mumbai, water supplies to construction sites, industrial and commercial establishments are already cut. This will cause the need for reduced manpower and labour cuts which will change the buying patterns in rural areas.” 

 

Mallick explained that labourers working at these sites come from rural areas and they send money back home. If this income stream is affected, it clearly cuts into rural spending. Rain deficiency effects will start showing up once the harvest season begins from the October-December quarter.

 

K Ramakrishnan. managing director - South Asia at market research firm Worldpanel by Numerator (formerly known as Kantar Worldpanel) said when agricultural income comes under pressure, households typically prioritise essentials and postpone discretionary spending.

 

He explained that the first signs of stress are usually visible in categories such as premium personal care, packaged snacks, hot beverages and home improvement purchases.

 

“Staples, health-related products, and value-focused brands tend to remain relatively resilient. The magnitude of the impact will ultimately depend on the extent of rainfall deficiency and the effectiveness of government support measures, but history suggests that discretionary rural consumption is often the one that gets hit due to monsoon-related stress,” Ramakrishnan said.

 

Parle Products expects food sales will not suffer a drastic hit from the impact of deficient rains.

 

“Food is relatively essential, and two parameters are at play: peace in West Asia could lower the cost of major commodities like crude oil and derivatives which helps in keeping price hikes under check which in turn helps in keeping demand stable. Also, the onset of the festive season will keep demand intact,” Mayank Shah, vice-president at Parle Products.

 

Shah explained that due to the El Niño impact, food sales could see a modest growth.

 

Two-wheelers, tractors

 

Tractor remains the segment most vulnerable to any weakening in rural demand as more than 80-85 per cent of sales is driven by rural markets, according to Poonam Upadhyay, director, Crisil Ratings.

 

Despite a strong start to the year, Crisil expects growth to moderate. Upadhyay said tractor wholesale shipments rose 19.3 per cent year-on-year in May, aided by healthy farm cash flows and GST-related affordability gains. But after the 23.5 per cent growth in FY26, Crisil expects wholesale volume growth to slow to 1-3 per cent in FY27.  "When farm confidence weakens, new tractor purchases are among the first to be deferred," Upadhyay said.

 

While government procurement at support prices and subsidies provide a partial cushion, any weakness in kharif output could test the resilience of rural demand, with July and August remaining the key months to watch rainfall distribution, she said.

 

Rating agency Icra last week said domestic tractor wholesale volumes are likely to grow 1-4 per cent in FY27 and identified agriculture and rural demand as key indicators to watch. Icra believes rainfall patterns and farm sentiment will remain critical variables for demand through the rest of the fiscal year.

 

But some key players are putting up a brave face.

 

Mahindra & Mahindra, India's largest tractor maker, has retained its forecast of mid-single-digit growth for the domestic tractor industry in FY27 despite concerns around El Niño.

 

"We've done a lot of work in understanding the correlation between tractor sales and El Niño. In the last 50 years, there have been around 13 instances of El Niño and in most of those years, tractor sales have not been significantly impacted," said Veejay Nakra, president, Farm Equipment Business, Mahindra & Mahindra.

 

He attributed the resilience to several structural factors, including government support measures, reservoir levels that are 12 per cent higher than last year, better terms of trade for farmers, early support price announcements for 14 kharif crops, fertiliser subsidies, crop diversification and the availability of lower-water seed varieties.

 

"So far tractor sales for April and May have seen more than 20 per cent growth in the industry. We yet need to see how June and July will play out," he said.

 

The timing is significant because around 40 per cent of annual tractor sales typically occur during the April-July period. Mahindra is also preparing a broad portfolio refresh during FY27, including launches under the Mahindra and Swaraj brands, technology-based variants under the Yuvo Tech platform and expansion of its Horizon One Refresh range.

 

An executive from another FMCG company who spoke on the condition of anonymity said the peace in West Asia will bring down inflation but with El Niño, crops are likely to be affected, and the impact on demand will be seen closer to the harvest time.

 

“Consumption will go down, not this month, but we will start seeing the impact closer towards the end of Q2 and Q3 onwards,” the executive said.

 

Regional impact

 

According to Madan Sabnavis, chief economist at Bank of Baroda, the impact of a sub-normal monsoon is likely to be region-specific.

 

Only certain areas and crop farmers would be affected, especially those growing pulses and oilseeds in Maharashtra, Madhya Pradesh, parts of Karnataka, Andhra Pradesh and Telangana, where lower farm incomes could weigh on consumption.

 

“In case their crop is not normal, their incomes come down and that will definitely have a bearing in terms of consumption. But it may not be spread to the entire agricultural sector,” he reckoned.

 

Sabnavis said if the monsoon comes in at 88-92 per cent of normal rain, gross value added (GVA) in agriculture could fall by about half a percentage point.

 

“We had earlier a projection of 2.5  per cent to 3 per cent, now we are seeing it to be around 2 per cent to 2.5 per cent growth in GVA in agriculture,” he added. He also noted that the organised FMCG segment could face more pressure as consumers shift toward cheaper products coming from the unorganised sector.

 

Monsoon’s progress

 

The rains that arrived over the Kerala coast after a delay of three days on June 4 have struggled to progress thereafter, due to the adverse impact of El Niño.

 

After an initial burst, its progress stalled over large parts of central, western and southern India leading to cessation of rainfall activities.

 

Monsoon is the lifeline in several parts of the country largely in areas where irrigation coverage is less than 25 per cent.

 

So far, as per the India Meteorological Department (IMD), the southwest monsoon is 40 per cent below normal in east and north-east India from June 1-23, 15 per cent below normal in north-west India, 67 per cent deficient in central India and almost 28 per cent below normal in southern peninsular India from June 1-23.

 

There are regions such as Saurashtra and Kutch in Gujarat, Madhya Maharashtra and east Madhya Pradesh where the southwest monsoon so far is around 91 per cent, 83 per cent and 70 per cent below normal, respectively.

 

The low rains have also pulled down water levels in reservoirs. Water in the country’s 166 major reservoirs is at 28.28 per cent of their total live storage capacity, according to the Central Water Commission. 

A difficult year

 

• FY27 likely to be a difficult year for consumption growth, according to FMCG companies
• Lower-income rural consumers likely to defer discretionary buys if farm incomes are under pressure
• Entry-level two-wheeler makers expect demand shortfall
• Tractor sales among first to be deferred when farm confidence weakens
• In the last 50 years, there have been around 13 instances of El Niño