India Meteorological Department (IMD), as well as private sector weather forecaster Skymet, have predicted normal monsoon this year, making it the third consecutive year of good rains. This is good news for the markets.
The stock market usually reacts positively to normal monsoon as it's a sentiment booster. Though dependency on monsoon has fallen over the decades, a normal monsoon is good news for the entire economy as it leads to increased farm production and increased demand from rural areas.
"You also need to factor in the upcoming elections and increased spending in rural areas by the government as well as the political parties. This spending combined with a good monsoon will have a bigger impact on the rural economy," says Jaspreet Singh Arora, Head, Research, Systematix Shares & Stocks.
The positive impact of normal monsoon on the country's fiscal situation will also prop up market sentiments. "The Prime Minister has talked about the need to support agriculture. A good monsoon will reduce the need for government support," says Amar Ambani, Head, Research, IIFL. Worries about rising inflation and resultant interest rate hikes by the RBI will also abate due to a good monsoon. Though there might be a small spike in inflation in the coming months - till June due to unfavourable base effect - inflation is expected to come down in the later part of the year due to a good monsoon.
Industries that are directly related to agriculture - fertiliser, pesticide, seed, etc. - stand to benefit the most. Companies such as UPL, Rallis India and Bayer Cropscience will be among the lead beneficiaries. Tractor companies and those with large exposure to tractors such as Mahindra and Mahindra will also benefit from the monsoon-driven growth in the rural economy.
Increased farm production and higher disposable income will have a positive impact for all retail-consumer-oriented industries. Since most fast-moving consumer goods (FMCG) companies such as Hindustan Unilever and ITC get a majority of their revenue from rural India, increased rural income will boost their growth. "FMCG companies such as Marico will also benefit from the reduced input costs (due to increased farm production)," says Amar Ambani, Head, Research, IIFL.
Besides consumer staples, demand for low-ticket consumer discretionary items - brown goods - will also rise benefitting their manufacturers. "The impact of increased rural income will be felt more on brown goods than on white goods," says Arora. Since the summer this time is likely to be harsh - a precursor to good monsoon - makers of room coolers and air conditioners will do well.
Select auto companies too will benefit from increased rural income. "The third year of normal monsoon with increased government spending is good news for auto companies, such as Hero Motocorp, with large rural market share," says Rakesh Tarway, Head, Research, Reliance Securities. Among passenger vehicles, Maruti Suzuki is best placed.
Banks and financial institutions with large rural networks will also be among the beneficiaries. However, we need to avoid lenders with structural issues. For example, while SBI with its large network will benefit from its rural exposure, it still faces asset quality concerns due to its huge corporate loan book.
This is why experts are betting only on retail-focused lenders. "Increased rural income is good for micro finance institutions because their collections will improve. Select NBFCs that give low-ticket loans will also be among the beneficiaries," says Arora. Here again, M&M Financial Services will be a significantly benefit because of its high exposure to tractor financing.
Pipe companies such as Finolex Industries will benefit due to increased irrigation and housing construction needs. Micro irrigation companies such as Jain Irrigation, on the other hand, may be adversely impacted because water conservation-related products and services see limited demand during a good monsoon.