The Hindu Business Line : Monsoons losing hold on India Inc.

IT ARRIVED too early, retreated when it should have reached a crescendo and has now staged a late, if not dramatic, comeback. The south-west monsoon this year has truly displayed the weather god at his whimsical best. Reports of the monsoon's faltering progress have also had stocks of fertiliser, pesticide, tractor, two-wheeler and vehicle makers dancing a jig on the bourses. But what does the faltering monsoon really mean for India Inc.?

First, how good (or bad) has this monsoon been? The Met Department's latest numbers (for the week ended August 13), show that the monsoon is now just 7 per cent below normal, in terms of the total quantum of rainfall. If this number has you celebrating, remember that the spatial distribution of rains is a more important number. This shows whether the rain god's munificence was evenly spread. The Met office says that in the monsoon season up to August 13, 27 sub-divisions (the Met Office divides the country into 36 sub-divisions for the purposes of measuring rainfall) received normal or excess rains. In 2002, a drought year, only half of the divisions had received excess or normal rains, by the same week in August.

Not a great monsoon

While this makes this monsoon better than the one in 2002, the monsoon still has a lot of making up to do before it can be labelled as satisfactory. That north-western India has borne the brunt of this year's erratic monsoon is also bad news for that part of India Inc which sells products directly to farmers.

This belt includes such affluent states as Punjab, Haryana, Uttar Pradesh and Rajasthan, which have traditionally been key consuming States for farm inputs and implements. Over 40 per cent of fertiliser and tractor sales originate from these States.

Lag effect lost

Then, there is the fact that the erratic progress of this monsoon may effectively neutralise the bounty that India Inc would have reaped from the lag effect of 2003's plentiful rains.

Data from the past 10 years suggests that two consecutive years of good monsoon rains inevitably perk up demand for farm inputs, consumer goods and vehicles.

In fact, fertiliser and tractor sales, which were brisk in the April-June period have flagged since July, as the monsoon's erratic progress probably persuaded farmers to hold back purchases.

Weakening influence on India Inc

However, despite this, we need to be wary of attaching too much importance to the monsoon's influence on India Inc, thanks to these trends:

Later half important: If the fate of Indian agriculture earlier depended entirely on how the south-west monsoon behaved, it is no longer the case. Over the past few years, there has been a more even spread of farm activity between the kharif (April-September) and rabi seasons (January-March).

In recent years, rabi output of foodgrains has matched or exceeded that in the kharif season. Therefore, for makers of farm inputs, all is not lost if the south-west monsoon proves to be a disappointing one, it can yet be made up in the latter half of the year. Yes, post-monsoon showers will still play a key role in determining how the rabi season shapes up. But the satisfactory build-up of water resources in the major reservoirs in recent weeks (water level was at 110 per cent of last year's levels by August 13) will certainly help the rabi crop.

The erratic monsoon may actually perk up sales numbers for agrochemical companies, as intermittent and unseasonal rains usually aid the build-up of pests and diseases, pepping up demand for their products.

Product prices are buoyant: While the unsatisfactory monsoon has resulted in reduced sowing for staple crops such as coarse cereals, rice and wheat; cash crops such as cotton and oilseeds have expanded their acreage this year. Thanks to global influences and the delayed monsoon, prices for farm produce such as sugar, wheat, rice and plantation crops are also ruling considerably higher than last year.

These factors could go to pep up rural purchasing power, even if output drops because of a poor south-west monsoon.

New growth drivers: Then, there are the many new growth drivers that have emerged for corporate India. Sales numbers over the past five years show that the swings in monsoon performance have not really swayed two-wheeler, commercial vehicle or consumer durable sales too much.

For instance, commercial vehicle, two-wheeler and durable sales accelerated to robust double digits in 2002-03, a year that saw the worst drought in recent years.

A slew of new growth and earnings drivers have now emerged for each one of the sectors, earlier believed to be monsoon-dependent. For consumer durable or automobile makers, the availability of cheap finance has been instrumental in driving demand. So the direction of interest rates may be a crucial factor to watch.

Commercial vehicle sales have weathered poor monsoon years, thanks to increased spending on road infrastructure, movement of foodgrains from warehouses to the markets and the robust freight movement that comes from a booming economy. For FMCGs, pricing pressures and intensifying competition are now more crucial issues than the uncertain monsoon.

For investors, this means that it is now time to look at a host of new factors, apart from the monsoon, when evaluating the prospects of companies, even those which are directly engaged in selling their products to farmers.

The monsoon will still have an important influence on overall GDP growth and consumer spending over the medium-term. But if you are trying to see how a company will fare this year or the next, stop tracking the course of an errant monsoon, and look at the other growth drivers that may make or break their earnings.

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