UMBRELLA, RAINY SHOES AND STOCKS

about 1 year ago
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By Ruma Dubey

Rains have come calling; be it Skymet or the IMD, both have done a good job of predicting the arrival of rains. So can we say that India finally has a weather system which can give us a more correct picture of the monsoon? That in itself is a relief!

This year, third year in a row, monsoon is expected to be normal. When the IMD says ‘normal’ it means the average over the entire country; it does not take into account the areas where it rained – last year some states had no rains or very little rains yet the year was declared ‘normal.’ The rains were deficient in states of Punjab, Haryana, certain parts of Uttar Pradesh, Madhya Pradesh and Vidarbha and excessive in Western Rajasthan, Saurashtra and Kutch, Tamil Nadu and Rayalaseema. This year, one hopes that it is an equitable distribution. Well, in times of such drastic weather change, that’s like hoping for a clean Ganga and good roads!

Thus for the farmers, at least as of now, the mood is optimistic that they would have a bountiful harvest. These are known as the ‘southwest monsoon’ and they are responsible for over 75% of India’s rains. June also marks the beginning of the kharif crops like rice, jowar, bajara, maize, ragi, millet, tur, urad, moong, groundnut, castor seed, soybean, cotton, turmeric, guar seed, sunflower, and sugarcane.

Thanks to the normal monsoon predicted by IMD, Govt  has set the foodgrain production target at 283.7 million tonnes for 2018-19, of which 140.20 million tonne will be from kharif and 142.5 million tonne from rabi.

What does all this mean for the stock market? We take a quick look at the sectors which could probably benefit, those which could be hit and those which will be unaffected. Obviously, the assumption is that rains will be good and crops will bloom and farmers will prosper. With more money in the hands of the villagers, naturally buying will go up; what with the sweetener of loan waivers too!

Sectors that could be gainers:

FMCG is the first which comes to mind. It is not that people stop buying hair oil and soaps when harvest fails but when there is a good crop, better buying power leads to buying of national brands and not local small-time brands, which are usually cheaper. So we need to keep a watch on ITC, Hindustan Unilever, Dabur, Marico, Nestle, P&G, Colgate. But we need to keep a watch on the effect of GST unfolding and more importantly, most of the consumer good stocks are as such at very high valuations; they are fully priced, leaving very little gains on the table. FMCG companies with huge cash reserves and wide established distribution networks would do well. And that means ITC, HUL and Nestle.

A rich reaping would also mean increased demand for two wheelers, cars, tractors. So companies like Bajaj Auto, Hero Honda, even Maruti, Escorts, Mahindra & Mahindra, could see rise in demand. Consumer durables, pesticides and fertilizers would also see a growth in demand.

Especially fertilisers, which saw the GST Council bring down tax on fertilisers to 5% from the earlier decided 12%, which in turn would help bring down farmers input costs. Rating agency, ICRA has put out a report stating that the move would reduce the cost of a 50 kg bag of urea by Rs.3 and lead to a similar drop in prices of other fertilisers.

 

Sectors which could slack:

Obviously, the biggest loser would be the crops which have had bumper harvests as increased supply, under normal circumstances, would mean lower prices. Tea prices are low and post GST, tea growers are worrying that prices could now go down further. This spells good news for companies like Tata Global, which apart from having its own plantations, also sources from third parties thus bringing down its procurement prices and improving margins. Sugar is one crop which is going to reap a bountiful harvest.

PSU banking is another sector which could see some uncertainty. Loan waiver and NPA worries continue to dog the sector.

Rainy season typically see’s construction, civil work and other housing sector, all slowing down, which in turn means lower demand for cement. Seasonally, this is the time when cement prices are lower.

Q2 is also the time when paint companies do not have much of a good run as people do not renovate or move into new homes during monsoon.

Then there are sectors which would continue, irrespective of the drought.

One such sector is IT and also power. If the Govt continues with its thrust on infra development, then we can expect capital goods, and infra companies to also to hold on. Power stocks which have higher portfolio of hydro power will seasonally have their best time.

We, living in this generation of smart phones and mobile apps, where everything is at the tip of our fingers, cannot do anything about poor rainfall. Surely that means that the notion, that we are in control, is so unreal, so flimsy. The power of Nature, no technology, no mankind innovation can ever surpass.

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