RAINS – WHAT IT BRINGS FOR DALAL STREET?

By Ruma Dubey

The stock market is capitalist. That’s a known truth. When there is a pandemic, stock price of companies making the 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.

This year, thankfully for India, which looks skywards for growth and sustenance, the IMD predicted a normal monsoon. Thus for the farmers, at least as of now, the mood is optimistic that they would have a bountiful harvest.

The latest data from the department of agriculture shows that the total sown area as on 30^th June 2017, as per reports received from States, stands at 222.30 lakh hectare as compared to 187.03 lakh hectare at this time last year. Rice, the main crop this time of the year, was sown/transplanted in 38.93 lakh ha, pulses in 18.80 lakh ha, coarse cereals in 38.12 lakh ha, sugarcane in 47.52 lakh hectare and cotton in 46.10 lakh ha.

What does all this mean for the stock market? We take a quick look at the sectors which could probably benefit, those which could be hit and those which will be unaffected. Obviously, the assumption is that rains will be good and crops will bloom and farmers will prosper. With more money in the hands of the villagers, naturally buying will go up; what with the sweetener of loan waivers too!

Sectors that could be gainers:

FMCG is the first which comes to mind. It is not that people stop buying hair oil and soaps when harvest fails but when there is a good crop, better buying power leads to buying of national brands and not local small-time brands, which are usually cheaper. So we need to keep a watch on ITC, Hindustan Unilever, Dabur, Marico, Nestle, P&G, Colgate. But we need to keep a watch on the effect of GST unfolding and more importantly, most of the consumer good stocks are as such at very high valuations; they are fully priced, leaving very little gains on the table. FMCG companies with huge cash reserves and wide established distribution networks would do well. And that means ITC, HUL and Nestle.

A rich reaping would also mean increased demand for two wheelers, cars, tractors. So companies like Bajaj Auto, Hero Honda, even Maruti, Escorts, Mahindra & Mahindra, could see rise in demand. Consumer durables, pesticides and fertilizers would also see a growth in demand.

Especially fertilisers, which saw the GST Council bring down tax on fertilisers to 5% from the earlier decided 12%, which in turn would help bring down farmers input costs. Rating agency, ICRA has put out a report stating that the move would reduce the cost of a 50 kg bag of urea by Rs.3 and lead to a similar drop in prices of other fertilisers.

Sectors which could slack:

Obviously, the biggest loser would be the crops which have had bumper harvests as increased supply, under normal circumstances, would mean lower prices. Tea prices are low and post GST, tea growers are worrying that prices could now go down further. This spells good news for companies like Tata Global, which apart from having its own plantations, also sources from third parties thus bringing down its procurement prices and improving margins. Sugar is one crop which is going to reap a bountiful harvest.

PSU banking is another sector which could see some uncertainty. Loan waiver and NPA worries continue to dog the sector.

Rainy season typically see’s construction, civil work and other housing sector, all slowing down, which in turn means lower demand for cement. Seasonally, this is the time when cement prices are lower.

Q2 is also the time when paint companies do not have much of a good run as people do not renovate or move into new homes during monsoon.

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

One such sector is IT and also power. If the Govt continues with its thrust on infra development, then we can expect capital goods, and infra companies to also to hold on. Power stocks which have higher portfolio of hydro power will seasonally have their best time.

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.