The Big Story: Why monsoon doesn't matter

After playing truant in the early part of the month, the south-west monsoon has picked up pace in the last few days. Thanks to heavy showers, the cumulative rainfall in June is almost 21 per cent higher than the long period average. (LPA is the average rainfall received during the 1951-2000 period.)

But, does a good spell in June guarantee rainfall through the season?

Not always, suggests an analysis of the month-wise rainfall data for the period beginning 1901. Between 1901 and 2014, rainfall during the month of June was above normal almost half the time. However, despite a good start, the rainfall did not progress well and thus the cumulative rainfall for the season was deficient almost a third of the time.

If the monsoon slips into a lull, should investors fret? Not quite.

Contrary to conventional belief, the impact of monsoon on sectors that are directly linked to agriculture has been neutral in the past. Over the last two decades, the south-west monsoon rainfall has been significantly lower than the LPA on three occasions. But interestingly, the sales of agri inputs — seeds, fertilisers and pesticides — have remained resilient during these periods.

Why has it been so? The principal reason for this is that farmers purchase bulk of the agri-inputs much ahead of the onset of monsoon.

Resilient seeds Take the case of seed, a primary agri input. Farmers purchase seeds well ahead of the start of the monsoon season, even though the actual planting may commence closer to the onset. Seed sales have thus been indifferent to the monsoon rainfall pattern. According to data compiled by the World Bank, distribution of certified seeds in India has remained healthy even during drought years — 2002, 2004 and 2009.

For instance, consider 2009, when the country faced the worst drought since 1972 and monsoon rainfall was 21 per cent below normal. The distribution of certified seeds increased by about 8 per cent to almost 28 lakh tonnes that year. Strong demand for seeds provided a leg-up to the performance of seed producers such as Kaveri Seed Company, that year.

The company, which is a leading player in cotton hybrid and maize seeds, saw its revenue grow about 32 per cent in 2009-10. The company’s profit rose about 27 per cent that year. This was thanks to the strong ramp-up in sales of its hybrid cotton seed brand — Jadoo.

Similarly, in 2002 and 2004, when monsoon rains were 19.2 per cent and 13.8 per cent below LPA, respectively, the total quantity of seeds distributed in India rose by 7 and 11 per cent, respectively.

Healthy seed sales helped Kaveri clock a 13 per cent growth in revenues in 2004-05; its profit grew 28 per cent that year. Likewise the company reported profit of ₹12 lakh in 2002-03, compared to a loss in the previous year.

Fertilising profits The usage of fertilisers, the other important farm input, has risen steadily even during the drought years. For instance, in 2009, total fertiliser sales in the country rose 6 per cent. So also, in 2002 and 2004, consumption of fertilisers rose by about 1 per cent and 7 per cent, respectively.

Similar to seeds, a good portion of fertiliser sales happens ahead of the monsoon onset, which has helped it buck the weakness in the monsoon trend, in the past. Besides this, the massive price subsidy provided by the government on fertilisers has also made sales resilient to fluctuations in monsoon rainfall. For instance, in India, farmers pay barely a fourth of urea’s total cost of production. While the cost of producing a tonne of urea is in the ₹15,000-25,000 range, the sale price has been kept unchanged at ₹5,360.

The difference between the sale price and the cost of production is paid by the government as subsidy directly to the producer. Farmers prefer urea fertilisers because of the lower sale price. This has helped urea producers such as Chambal Fertilisers and Tata Chemicals sustain healthy profit growth even during the drought years — 2002-03, 2004-05 and 2009-10.

In 2002-03, Tata Chemicals recorded revenue and profit growth in excess of 16 per cent and 55 per cent, respectively. Likewise, in 2005-06, the company recorded revenue growth of over 17 per cent and profit growth of almost 4 per cent. Similarly, Chambal Fertilisers managed to clock profit growth of almost 16 per cent and 77 per cent in 2002-03 and 2004-05, respectively. Again, in 2009-10, despite the severe drought, the company managed to rake in 8 per cent growth in profit.

The government provides price concession for complex fertilisers too. Currently, under the nutrient-based subsidy scheme, the subsidy amount is fixed by the government.

Farmers bear three-fourth of the production cost while the balance one-fourth is paid by the government as subsidy directly to the fertiliser makers. As with urea, complex fertiliser despatches have remained strong even during periods when the monsoon was deficient. This has enabled complex fertiliser makers such as Coromandel International and GSFC achieve healthy volume growth even during challenging times. Even as these companies did sell more fertilisers during the drought years, their profitability was impacted due to reasons other than the monsoon.

For instance, while Coromandel managed to clock a healthy 61 per cent jump in profit for the year 2004-05, its performance for the 2002-03 and 2009-10 periods was impacted by changes in the fertiliser pricing policy and volatility in global commodity prices.

Agrochemicals unbowed Similarly, below-normal monsoon rainfall has had little impact on the sales of agrochemicals. For instance, the consumption of agrochemicals in India during the 2002 and 2004 drought years remained healthy.

However, the total consumption of crop protection chemicals declined 5 per cent in 2009; and this was largely on account of supply-side issues due to closure of several active ingredient manufacturing facilities in China.

However, despite the erratic monsoon, pesticide makers have managed to sustain healthy growth. Bayer Crop Science, for instance, saw its revenue surge 51 per cent and profit more than double in 2002-03. Likewise in 2009-10 too, the company managed to grow its revenue and profit by 17 per cent and 35 per cent, respectively.

Similarly, Rallis India has also been successful in growing revenues and profit during poor monsoon years. For instance, in 2005-06, the company’s revenues and profit grew 8 per cent and 27 per cent, respectively.

Automobile Companies in sectors that are believed to thrive on rural consumption — such as automobile, FMCG and consumer durables — have also remained immune to fluctuations in monsoon rainfall.

Consider two-wheeler sales. In 2004-05, the total sales of two-wheelers made in India grew almost 17 per cent. This includes export sales to other countries, which partly compensated for the slowdown in rural markets. And the monsoon rainfall was almost 14 per cent below normal that year.

If you expected the impact of a poor monsoon to show up in two-wheeler sales with a lag, the strong 15 per cent growth in two-wheeler sales in the subsequent year, 2005-06, belies that. So also in 2009-10, when the country experienced severe drought, two-wheeler sales grew a strong 25 per cent. This was on four counts.

First, launch of new models across segments — entry, mid and high-end — aided growth.

Second, a sharp cut in lending rates also spurred the demand for automobiles. Following the global financial and commodity meltdown in 2008-09, the RBI, to spur domestic growth, slashed policy rates from 9 per cent in October 2008 to 4.75 per cent by April 2009.

Third, the government’s efforts to keep the farming community in good humour by way of a higher minimum support price (MSP) also played a role in keeping rural consumption demand intact. Four, the ₹60,000-crore agriculture loan waiver implemented in 2008 did go a long way in alleviating the stress on the farmer community.

Companies in the two-wheeler space saw their sales and profits soar in 2009-10. The country’s leading two-wheeler maker Bajaj Auto recorded sales growth in excess of 36 per cent; its profits saw a 2.5-fold rise that year.

Likewise, two-wheeler maker TVS Motor Company made a profit of over ₹33 crore in 2009-10, compared with a loss of ₹63 crore in the previous year.

Likewise, the cumulative sales of passenger cars (which includes domestic and export sales) also remained strong at about 27 per cent in 2009-10. Here again, there was no lag effect on car sales for the subsequent year.

For instance, car sales in 2010-11 remained healthy at over 22 per cent. In the passenger car segment, consider the performance of market leader Maruti Suzuki. The company’s sales grew at a robust 42 per cent while its profit more than doubled that year.

FMCG FMCG companies, believed to benefit from the aspirational demand from the rural population, also put up a good show during times of deficient monsoon. Leading consumer goods producers such as ITC, Dabur and Emami have managed to sustain healthy revenue growth even during the drought years. This was on three counts. First, generous increases in the MSP in the drought years partially compensated for the loss due to inadequate rainfall.

Second, price increases by these companies also helped mitigate the revenue loss on account of weak volume growth. That most FMCG companies are also present across price points also helped partly capture any down-trading into cheaper brands.

Third, the implementation of the Sixth Pay Commission in 2008-09 and resultant wage increases have had a positive rub-off on sales in urban markets. This possibly made up for the weakness in rural markets.

Cigarette-to-hospitality conglomerate ITC’s revenues grew over 16 per cent in 2009-10, a year when monsoon was deficient by almost 22 per cent.

Likewise, revenues at personal care products manufacturer Emami’s jumped 37 per cent that year. Personal care multinational P&G Hygiene’s sales grew a healthy 17 per cent in 2009-10.

Consumer durables It was not just fast moving consumer goods that defied the weak monsoon rainfall trend, but also consumer durable goods. Companies in the brown and white goods space such as Havells India, Bajaj Electricals, Whirlpool and Videocon Industries have been able to buck the trend and sustain healthy growth. Higher MSPs, agri loan waiver and lower interest rate regime aided growth.

Consider Bajaj Electricals; the company managed to grow revenues by over 26 per cent in 2009-10, aided by better product mix and ability to take price increases in specific products.

Likewise, Havells India and Videocon Industries have managed to grow revenues by almost 12 per cent and 57 per cent, respectively, that year.

It’s different this time While the agri and consumption themes may be insulated from any weakness in the monsoon, the impact of deficient rainfall may be more pronounced this year than in the past, for three reasons. First, the government’s keenness to keep inflation under check to provide room for the RBI to cut interest rates further may restrain it from providing any big relief to farmers by way of higher MSPs.

Second, to take advantage of the massive untapped potential in the rural markets, companies in the automobile, consumer goods and durable goods space have ramped up presence here.

The share of revenues from the rural market has gone up steadily over the last few years. Hence, the impact on account of a subdued monsoon may likely manifest in the forthcoming period.

Given the below-normal monsoon last year, the rural economy has been gearing for a slowdown. Two consecutive years of bad rainfall will only accentuate the woes of rural India.

Also read: No monsoon blues for markets

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