The Hindu Business Line : Can a good monsoon affect your investments?

A delay in the arrival of rains or a whimsical monsoon that alternates between deluges and dry spells could have a big impact on the production of foodgrains, prices of which are now feeding the spiralling inflation

When the weather affects crops, there’s a fallout on your investment too.

Kumar Shankar Roy

It has been observed that the stock market has a tendency to be weaker between June and September — the usual monsoon period. A little bit of rain on the streets may lift your mood, but did you know that the monsoon could be a critical factor in how stocks in select sectors and businesses fare?

The Indian Meteorological Department has predicted a normal monsoon this year across most of India. How should you view that piece of information? And what about its effect on your investments? To find the answers to these questions, read on...

Monsoon, not soon

The monsoon accounts for more than two-thirds of the country’s requirements of rainfall. Although the rise of services has made the Indian economy progressively less dependent on agriculture, the state of the farm economy remains an important “balancing figure” driving GDP growth.

This is particularly so this year when industrial growth has been sputtering in recent months and market watchers are looking to agricultural growth to fill the gap.

How the monsoon fares is also crucial to inflation in the food basket, now top-of-mind for all of us as consumers and investors.

A delay in the arrival of rains or a whimsical monsoon that alternates between deluges and dry spells could have a big impact on the production of foodgrains as well as cash crops, prices of which are now feeding the spiralling inflation numbers.

With a global shortage of food crops such as rice, wheat and corn, the acreage planted under various food crops and the final harvests will be closely watched this year for cues on whether we’ll b able to feed all those hungry mouths. Any shortfall, could fuel high food prices, leading to a rise in the inflation index.

Gains from rain

But suppose the monsoon turns out to be okay? We mentioned earlier that the contribution of rural India to the economy may be moderating but it is quite important to consumption-led sectors as the bulk of Indians reside in these villages or nearby.

It is therefore quite easy to explain why stocks of companies manufacturing FMCGs, two wheelers and a host of agricultural inputs dance to reports of a good or a bad monsoon. Here are a few such sectors:

Fertilisers: The demand for agricultural inputs such as fertilisers, hybrid seeds and pesticides is directly pegged to the acreage of various crops planted.

Monsoons play a key role here. Successive years of good monsoon are also necessary if farmers are to be left with sufficient cash to invest in agricultural inputs the next year.

Automobiles: While sales of larger vehicles may no longer be linked to the monsoon, two-wheeler sales could see an upside if the monsoon turns out to be normal. Companies like Bajaj, Hero Honda, and TVS Motor will benefit and possibly so, will their shares.

Sometimes the positive effect is delayed and registered around the time of Diwali, the main shopping season.

Farm equipment makers: If rain gods do smile – expect sales of tractors and other farm equipment to benefit.

Though sales of farm equipment have been driven by availability of credit in recent years, the monsoon remains an important factor that influences demand for these sectors.

Companies such as Mahindra and Mahindra which has acquired Punjab Tractors will heave a sigh of relief if there’s good monsoon, especially when unfriendly interest rates have dampened sales of other vehicles for a better part of 2007-08.

Consumer goods: An ‘okay’ rainy season may mean that the rural populace will have higher disposable income.

This will give a fillip to sales of FMCG products such as toothpaste, toothpowder, soaps and shampoos, which rely heavily on rural demand for growth.

Companies that have substantial presence in semi-urban and rural areas in this sector are Hindustan Unilever, Colgate, Dabur and Godrej Consumer.

With the broader markets already paying more attention to FMCG stocks as defensive plays in times of stock slide, a good monsoon may just further their cause even more.

Cement: Cement despatches have traditionally slowed during the monsoon months, but this trend has been broken over the past couple of years with the realty and construction boom that has been underway.

With both sectors now suspected to be in a slowdown in recent months, will cement demand fall into its old pattern and slacken during this monsoon?

The numbers from the cement companies in the coming months will hold the key.

Before you start betting on the monsoon effect, do note that the final word on the monsoon is yet to be said.

A cautionary note

The meteorological department has just ‘forecast’ a normal monsoon.

As you know, there is many a slip between the cup and the lip. The Met department’s prediction is certainly not foolproof.

The real effects of a good monsoon, if it materialises, may be captured in corporate performance only later this year. And the verdict on the monsoon is not restricted only to the quantum of rainfall.

Apart from the quantity of rainfall, the consistency of rainfall and the way in which it is distributed across states, would need to be tracked to know the fate of farm produce and all those who depend on it this year.

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