"We are expecting a good monsoon", "rural demand is expected to pick up", and "early monsoon is expected". These phrases are very commonly heard in India as the monsoon approaches. Why is the monsoon so crucial to the Indian economy?
The Indian economy, mainly the farm sector, relies heavily on the southwest monsoon rains. Also, agriculture contributes about 20% to the GDP, and 55% of India's arable land depends on the monsoon for irrigation. A good monsoon means that the farm output is stable, which translates to improved consumer spending, especially in rural areas. It also affects rural demand for FMCG products, tractor sales, credit growth, and fertilizer sales. This dependence is reflected in how the stocks of companies engaged in these sectors perform.
With the onset of monsoon, we look at stocks directly dependent on monsoon. A good or normal monsoon will mean better performance for these stocks and improved returns for investors, whereas a poor monsoon will negatively affect these companies' businesses.
1. Hindustan Unilever (NS: HLL ) Limited: HUL is an FMCG company that highly relies on rural demand, which depends a lot on the rainfall pattern of that year. With a normal monsoon prediction, rural demand is expected to pick up, aiding revenue growth. The company has strong financials and is debt-free. Its sales growth has also remained strong over the last few years. Headwinds include rising inflation and interest rates.
2. Dabur: Dabur India Ltd. (NS: DABU ) is the world's leading ayurvedic products company. The company has consistently grown with the increasing popularity of yoga and nature-based medicines. Almost half of its revenue comes from the rural sector, so a good monsoon is likely to boost its sales. Its market share has consistently improved across all market segments over the last few years. However, rising input costs have affected its margins.
3. Coromandel International Ltd (NS: CORF ): Coromandel International is one of the biggest manufacturers of phosphatic fertilizers. It operates in two primary segments- specialty nutrients and plant protection. Its product range includes pesticides, fertilizers, and other specialty nutrients. Its business is directly dependent on farm income and agricultural growth, dependent on rainfall. The company is particularly strong in the South Indian states of Telangana and Andhra Pradesh. With the onset of monsoon and the prediction of normal rains, the company seeks to improve revenue and gain market share.
4. Mahindra and Mahindra (NS: MAHM ): M&M is one of the leading automobile companies in India and the world's biggest tractor company by volume. It produces SUVs, pickups, heavy commercial vehicles, two-wheelers, farm equipment, etc. The company's significant revenue comes from the farm equipment it produces. It is expected that tractor sales will increase if the monsoon is good, as farmers want to have mechanized equipment to harvest their crops. Headwinds in the form of inflation are expected for the stock. Positive factors for the stock include easing supply chain, recovery in the farm sector, and the PLI scheme initiated by the GOI.
5. Hero MotoCorp (NS: HROM ): Hero MotoCorp is India's biggest manufacturer of 2-wheelers. It has a market share of more than 35% in the sector. The company derives almost half its revenues from rural areas, which is why it depends on rainfall patterns and agricultural growth. Headwinds for the stock include currency fluctuation, increasing interest rates, and growing inflation. These factors can seriously hinder the growth prospects of the company. However, a normal monsoon can help revive consumer demand, especially in rural areas. This will have a positive impact on domestic sales. The PLI scheme of the government will also have a positive effect on the stock.
There are predictions about normal monsoon, but one must realize that these stocks are not entirely rain-dependent. These stocks have strong fundamentals for long-term growth. To derive full benefit from these stocks, an investor should carefully study the fundamentals of these companies or avail of the services of a SEBI Registered Investment Adviser who can guide you in your investment choices.
Disclaimer: The above analysis is just for informational purposes. It shouldn't be taken as a recommendation.
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