DROUGHT - THE WAY MARKETS WILL LOOK AT IT

By Ruma Dubey

The stock market is capitalist. That’s a known fact. When there is a pandemic, stock price of companies that make the curing drug, shoots up.  For the market, every adversity is an opportunity. But therein lies a message too – look for the silver lining in every cloud.

The biggest adversity facing the country currently - 10 states have already declared a drought.  North Interior Karnataka, Telangana, Maharashtra, Gujarat, Madhya Pradesh, Uttar Pradesh, Bihar, and Haryana are scorching under drought or drought-like conditions. So what is the silver lining in the news of drought and soaring mercury for the capital market; what is the opportunity for the markets here?  

We take a quick look at the sectors which could probably benefit, those which could be hit and those which will be unaffected. This seems more like a vulture scavenging for food amongst the dead but then, many a times, isn’t that how the stock market is?

Here we assume that rural income will slump and India Inc, which has been betting big time on buying from rural India to prop up the economy will suffer. With lesser money in the hands of the villagers, naturally buying will come down.

Sectors that could be affected:

FMCG is the first which comes to mind. There could be fall but not as precipitated as anticipated as people would not stop buying all together. If employment is indeed guaranteed and money does get disbursed on time, this sector might not take as bad a hit. So we need to keep a watch on ITC, Hindustan Unilever, Dabur, Marico, Nestle, P&G, Colgate. The good news for them is that raw material prices have been behaving well and that was reflected in the better margins. With demand slack, prices thus could come down. So they will have to rework their product pricing and probably concentrate on getting higher volumes on low cost items. FMCG companies with huge cash reserves and wide established distribution networks would do well. And that means ITC, HUL and Nestle. Yes, especially Nestle for whom urban demand for Maggi is set to soar all over again.

Yes, what people could put off buying are two wheelers, cars, tractors. So companies like Bajaj Auto, Hero Honda, even Maruti, Escorts, Mahindra & Mahindra, could see fall in demand. Consumer durables, pesticides and fertilizers could also see a fall in demand. Q1 and Q2 are its best seasons we could see some hit here.

PSU banking is another sector which could see some uncertainty. Loan waiver does not seem a possibility as the Govt cannot simply afford it but yes, concerns over NPAs could once again get revisited. In times of such crisis, PSU banks do provide various special credit packages, including rehabilitation measures and other relief, whenever there is severe repayment crisis due to drought or such other calamities. They might also need to provide cheaper finances at the behest of the Govt. There is already news that Marathwada and Western Vidarbha regions, will get some relief from banks in the form of rescheduling of agriculture loan and also get fresh loans for the new crop season. We could see something on the same lines in Karnataka too.

Sectors that could gain:

Obviously, the biggest gainer would be the crops which have had bumper harvests. Sugar stocks are sure to reap a bountiful harvest. Production is expected to fall short this time around and prices have already started soaring. ISMA released its report stating that 243.44 lakh tons of sugar has been produced by sugar mills during the current sugar season.  This is about 21.24 lakh tons less than the sugar produced upto the same corresponding period last year when 264.68 lakh tons of sugar was produced. As compared to 245 sugar mills operating on 15th April last year, around 117 sugar mills are operating as on 15th April, 2016.  Based on this news, Balrampur Chini, Dalmia Sugar are most certainly very good buys.

Currently the price of most of the commodities is low but if rain does play truant, most prices will rise, including rice, tea and coffee.

At times when water is low or a farmer goes through a year of drought, demand for irrigation devices go up to ensure that next year goes better. Drip irrigation demand is sure to go up and Jain Irrigation is a good stock to bank on. Jain Irrigation’s micro-irrigation systems business can benefit from the current drought as state governments across the country will incentivise farmers to implement irrigation system and save water.

Desalination plant demand could rise and so could that for water treatment plants - Va Tech Wabag, Thermax, Siemens and Ion Exchange could be good bets.  More pipes could be laid – Finolex is a stock to watch out for.

Then there are sectors which would continue, irrespective of the drought.

One such sector is IT and also power. If the Govt gives more thrust on infra development, then we can expect capital goods, cement and infra companies to also hold on. Avoid power stocks which have higher portfolio of hydro power. Education stocks too will continue to do well. Pharma too falls in the same category.

We, living in this generation of smart phones and mobile apps, where everything is at the tip of our fingers, cannot do anything about poor rainfall. Surely that means that the notion, that we are in control, is so unreal, so flimsy. The power of Nature, no technology, no mankind innovation can ever surpass.