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India Inc need not lose much sleep over the poor monsoon forecast. Contrary to general perception, there is only a weak correlation between monsoon rains (June-September) and growth in corporate revenues. Additional factors such as the general growth environment, global macro-economic factors and government response to a weak monsoon matter more than the extent of rain.
There were three instances of deficient rain during the 2003-2008 boom but India Inc's revenues continued to grow in high double digits during that period, indicating rains had only a marginal impact. For example, in 2003, the south-west monsoon was deficient by 19.2 per cent but net sales grew 14.1 per cent year-on-year in 2002-03 - faster than in 2000-01, when the rain gods were more considerate. A rainfall deficit of 20 per cent or more is officially a drought year.
A benign global economic environment and the resulting double-digit growth in exports more than made up for lower domestic demand due to a poor monsoon, leading to faster growth.
Some companies and analysts, however, worry that back-to-back poor monsoon may further weaken demand, leading to more pain for India Inc. Videocon Group Chairman Venugopal Dhoot said there would be an impact on corporate earnings if monsoon was deficient or weak.
"Remember a sizeable portion of India's population resides in the villages and companies across sectors have headed to rural areas in the last few years. Obviously, if monsoons are weak, farm incomes will come down, impacting purchasing power of consumers in rural areas," Dhoot said.
Nilesh Shah, Managing Director, Kotak Mutual Fund, said while bad monsoon will impact rural consumption and fuel inflation, there wassn't much correlation when it comes to corporate earnings. "Agriculture contributes 17 per cent to the gross domestic product and a bad monsoon impacts half of that due to the kharif season. But it does not impact technology companies, pharma or information technology companies that constitute a large part of the Sensex," he added.
In 2004-05, India Inc had one the best years in nearly a decade, with net sales growth of 25.8 per cent and net profit growth of 46 per cent despite 13.8 per cent deficient rain in the summer of 2004. India Inc's growth streak was broken by the 2007 global financial crisis rather than rain gods.
On the other side, 2012 was one the best years in terms of rainfall but it provided little incremental growth to India Inc in 2012-13 and the slowdown continued. The country also witnessed a drought-like situation in the summer of last year but the incremental decline in growth in 2014-15 was small.
The analysis is based on the last 15 years' financial data for 426 companies (excluding financials and oil & gas) from BSE 500, BSE Mid-cap and BSE Small Cap Index.
Thermax CEO M S Unnikrishnan said weak monsoon could impact the overall sentiment but it was unlikely that drought will occur all across the country. In any case, he said, advance information would help government agencies to take corrective action and plan for water conservation, sanitation and drinking water in areas which are likely to receive scanty rainfall. Thus, the impact of a possible drought on rural economy might be limited.
Analyts agree. "Monsoon rains are important but other factors have a greater impact on corporate earnings. The government's fiscal intervention in the farm sector through minimum support price and rural expenditure schemes have a greater impact on rural consumer demand than post-monsoon harvest," said Dhananjay Sinha, head of institutional equity, Emkay Global Financial Services.
There have been three instances of deficient rains since 2009 but these have had only a marginal impact on rural consumer demand. "The post-2009 period was one the best years for consumer goods as higher government expenditure on rural schemes more than offset bad rains," Sinha added.
It's also difficult to single out the impact of bad monsoon from other macroeconomic factors such as weak export demand or a general slowdown such as in the last three years. There is little risk of food inflation either, with the Food Corporation of India sitting on nearly 50 million tonnes of foodgrain stock, nearly twice the standard buffer stock of 25 million tonnes.
