The Hindu Business Line : Monsoon effect: No rain-shadow on India Inc

AT this time of the year, it is usual for market observers to attribute the gyrations in stock prices of companies in certain sectors to the "monsoon effect".

The prospect of delayed or inadequate rains usually spells trouble for companies marketing fertilisers, tractors, commercial vehicles or two-wheelers; while a bountiful monsoon is usually greeted with a healthy appreciation in their stock prices.

But the numbers for the past 15 years show that the relationship between the monsoon and sales performance for these sectors is far from straightforward.

Sectors traditionally believed to be rural-dependent have become more resilient and can handle a couple of years of poor monsoons.

A set of new factors has compensated for the sluggish demand stemming from a poor monsoon, for consumer goods and commercial vehicles. Companies marketing agricultural inputs have been cushioned by lower seasonality and better prices for farm produce. The better credit flow to agriculture means farmers can resort to more capital-intensive farming.

Finally, with the winter half of the agricultural season (the rabi season) becoming as important as the summer (the kharif) in determining farm fortunes, the South-West monsoon's influence on the agrarian economy is also on the wane.

Weakening linkages for consumer goods

Sales numbers show that even traditionally rural-dependent sectors are becoming more resilient to the monsoon.

Over the past six years, only twice did two-wheeler and commercial vehicle sales move in tandem with the quantum of rainfall.

Five of the past six years had below-normal rainfall in the South-West monsoon season. Yet, commercial vehicle and two-wheeler sales posted strong double-digit growth in all the years, except one.

In fact, commercial vehicle sales revved up from 7 per cent to 30 per cent in 2002-03, the year of the worst South-West monsoon in over two decades.

For commercial vehicles, a sharp acceleration in industrial activity and a noticeable improvement in road infrastructure appears to have made up for the decline in foodgrain movement, which earlier used to catalyse sales.

Two-wheeler sales tell a similar story, posting a robust double-digit growth over the past four years, despite patchy monsoons. The changing product mix of the players appears to have shielded them from the fluctuating rural demand for products such as mopeds.

Over the past two years, the two-wheeler market has expanded sharply on the back of a slew of new product offerings in the "executive" motorcycle segment targeting the urban biker.

Consumer good sales over the past six years showed an even more tenuous link with the monsoon.

The sharp acceleration in FMCG sales in the second half of 2004 came after a particularly erratic monsoon. Industry numbers suggest that it is expansion in urban sales that is driving the FMCG market.

Similarly, easy consumer credit and price reductions have revved up consumer durable sales, with erratic monsoons having little or no influence.

Prices, credit for agri-inputs

The monsoon does continue to wield some influence on the sale of such agricultural inputs as fertilisers, agrochemicals and tractors. But investors have to factor in a time lag for the monsoon effect and evaluate other influences on rural income such as farm product prices and credit flow to farming households.

Two consecutive years of poor monsoons usually lead to a slump in fertiliser sales.

However, the past two years have seen growth in fertiliser offtake despite unsatisfactory monsoons. Sales of tractors, which usually swing one way or another depending on the monsoon performance, too have trended up over the past two years.

This is explained by two factors. Though agricultural output has been impacted in these two years, prices of farm produce have strengthened substantially on the back of domestic shortages and global price trends. This is likely to have offset some of the impact on farm incomes of smaller harvests.

The government-pushed emphasis on agricultural credit too appears to have given a fillip to rural operations, catalysing purchases of farm machinery such as tractors.

Agrochemical sales too are influenced by the monsoon. But in recent years, players have managed to reduce the impact of a poor monsoon on domestic sales by ramping up their export presence.

Leading players have also changed their product mix to target crops and markets that are not predominantly rain-fed. Agrochemical sales have grown 13 per cent in 2004-05 despite a 13 per cent shortfall in the South-West monsoon.

The better half?

A decade ago, the performance of the South-West monsoon could make or break agricultural output because at least 60 per cent of it came from the kharif (April-September) season. But, now, crop diversification and better irrigation facilities have ensured that the winter crop makes an equal contribution to the annual farm output.

As a result, the cropping patterns are evolving from an extremely seasonal activity, centred in the kharif months (July-September), to a year-round activity.

This trend has had three implications for companies manufacturing farm inputs. One, their sales performance is now more evenly spread over the two halves of the year.

Second, a shortfall in agri-input sales in the kharif season, because of delayed monsoon, is not debilitating as it can be made up in the winter months.

Third, the increasing rabi contribution tends to lengthen the lag effect of a monsoon; a part of the proceeds from the kharif harvest is reinvested in the rabi crop. This postpones rural purchases to the end of the farming season.

As a result, a normal or above-normal South-West monsoon may not show up immediately in sales of consumer goods, but can deliver a significant boost a couple of quarters down the line.

What is in store?

Based on these observations, what is in store for this year? After playing truant last year, the South-West monsoon has been quite good in terms of quantum and spatial spread in 2005. As of August 11, the weighted average rainfall for this season was 5 per cent above normal.

Rainfall was also evenly distributed across the major agricultural belts, with only the North-East experiencing a deficit.

After several years, copious rains have significantly boosted storage levels in the reservoirs that feed the irrigation system. At present, the storage level in the 76 major reservoirs across the country is at twice the levels of last year. It is also about 50 per cent higher than the average storage levels for the past 10 years.

Given the weakening linkages with the monsoon in recent years, investors in commercial vehicle, two-wheeler or consumer goods stocks should probably not bet on any boost from the "monsoon effect" this year.

Fertiliser and agro-chemical sales have been less than brisk in the April-June quarter, due to the delayed monsoon onset. Excess rains in July-August are also none too positive for sales.

However, investors can expect a volume boost to fertiliser and agrochemical sales over the second half of the year, as farming operations benefit from the healthy storage position in reservoirs. The lag effect of this monsoon may also carry forward into the next year, translating into good offtake in the 2006 kharif season.

Tractor sales may power up as the availability of credit and the rising acreage under commercial crops help sales numbers.

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