A good monsoon is an obvious positive, but certain companies stand to benefit more.
The rainfall across the country has brought cheer to investors. After the bad monsoon of last year, clouds seem to be favourable this year and could be a good investment theme.
Last year, hit by a bad monsoon, agricultural growth fell 0.20 per cent. This time, analysts estimate the growth rate at 3.45-4 per cent. According to the latest update of the Indian Meterological Department, the monsoon has improved significantly from June to September.
| RURAL GAINS | |||
| Company | CMP (Rs) | Trailing | FY12E |
| PE (x) | |||
| Coromandel Int | 520 | 14 | 9 |
| Tata Chemical | 347 | 18 | 10 |
| HUL | 255 | 27 | 21 |
| Hero Honda | 1889 | 17 | 13 |
| M&M | 653 | 17 | 14 |
| E: Analyst reports | |||
In the last week of July, it was 38 per cent more than normal. This pulled down the cumulative rainfall deficit to five per cent below normal, from 16 per cent at the end of June.
The direct impact is clearly on the rural purchasing power. “We expect that a good kharif crop will lead to an increase in the purchasing power of rural India. This should spur consumption,” says Madan Sabnavis, chief economist, Care Rating.
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Some direct beneficiaries from an investment and valuation point of view are:
Tata Chemical
Tata Chemical holds over 50 per cent in Rallis India, which is mainly into pesticides. After consolidation, Tata Chemical could see earnings from agriculture jump 40 per cent, which is higher than the 27 per cent growth in financial year 2009-10. The company is now among the top players in the agriculture input business. As the outlook for its chemical and fertiliser businesses is improving, analysts expect the company to do better and the stock to be re-rated.
In the automobile space, M&M could be a direct play on agriculture as it generates 30-35 per cent of its revenue from the tractor segment. For the first four months of the financial year, the company sold 64,740 tractors, 15.1 per cent more than last year. For the rest of the year, the growth rate should be higher as a result of better monsoon. Other segments are also growing at a decent pace. Its two-wheeler foray has also seen good progress. Overall, M&M’s earnings are expected to grow 19 per cent over the next two years. The stock is valued 730-750 per share on the sum-of-the-parts basis.
Hero Honda
A good monsoon will have a positive impact on the two-wheeler industry, especially the leading manufacturer, Hero Honda. The company generates 60 per cent of its sales in rural markets. In the first quarter, its volumes grew about 12 per cent, which analysts believe should be higher for the rest of the financial year.
Hindustan Unilever
For Hindustan Unilever, which derives 45 per cent revenues from the rural hinterland, the monsoon is an important factor. Rural India is price sensitive and mass brands like Lifebuoy, Sunsilk and Wheel will come to the fore as rural consumption starts to pick up.
Lifestyle products could also attract more volumes as disposable incomes rise.
Coromondel International
Coromondel International, with a pan India presence, is in an expansion mode. Moreover, being one of the largest private sector players, the company will gain from the monsoon as it has a value-added portfolio, reckon analysts.
There are expectations that the company will clock an earnings growth of about 30 per cent over the next two years. The problems of ‘sales returns’ which the industry faced last year will also be taken care off by the weather gods.