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A strong monsoon season is great news for these Indian stocks
(Bloomberg) — Shares of Indian companies that earn much of their revenue from the country’s interior are showing signs of recovery as traders bet that abundant monsoon rains will lead to better farm yields and boost rural demand.
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Motorcycle makers, farm equipment makers and fast-moving consumer goods producers rallied following forecasts of timely and above-normal monsoon rains in 2024, after extreme and unseasonal heat wreaked havoc on Indian agriculture in the last two years. Sales volumes in rural areas are improving and several large consumer goods companies predict stronger business in the future.
The Nifty FMCG index is up 1.5% so far in May, outperforming the benchmark NSE Nifty 50 index by more than two percentage points. It has underperformed in each of the previous six months.
“The market is expecting a recovery in rural demand after a good monsoon,” said Sahil Kapoor, strategist at DSP Mutual Fund in Mumbai. If forecasts of above-average monsoon this year come true, it will help agricultural production and support rural incomes, he said.
The rally in rural stocks is also good news for India’s broader stock market, whose stellar rally in recent years has been disproportionately fueled by investment-heavy companies that have benefited from increased government spending on infrastructure. Furthermore, abundant rains could help the central bank’s efforts to cool inflation by reducing gains in food prices, thereby improving prospects for India’s economic growth and corporate profits.
Hindustan Unilever Ltd. – seen as an indicator of consumer appetite in India as its products are sold in all parts of the country – said it sees demand gradually improving. Rival Dabur India Ltd. expressed the same sentiment, while motorcycle maker Hero MotoCorp Ltd. said it sees most of its requests for new vehicles now coming from rural areas.
“We think the rural economy is starting to come back,” said Rajeev Agrawal, fund manager at New York-based DoorDarshi India Fund. “This is reflected in strong sales of two-wheelers.”
Sales of motorcycles and scooters in India increased 33% over last year, according to data from the Federation of Automobile Dealers Associations. More generally, fast-moving consumer goods companies recorded 7.6% year-on-year sales growth in rural areas in the quarter ending in March, according to the study by Emkay Global Financial Services Ltd., which cites data from Nielsen. It is the first time that the measure has surpassed urban growth in three years.
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It is true that there are question marks over the dynamics and extent of the recovery in demand in the rural sector, given the low basis for comparing profits and the fact that some companies have seen volumes benefit due to price reductions.
“This is still a hopeful trade,” said Kapoor of DSP Mutual Fund. “There has been no significant recovery in profits or sales volumes so far.”
For Morgan Stanley analysts, cyclical businesses still lead India’s growth and this should result in a delay in defensive sectors. “We are still midway through this cycle for commodities and we expect them to continue to underperform and depreciate in value,” they wrote in a May 9 note.
Still, investor appetite for rural stocks has strengthened amid growing signs that India’s investment-driven growth may be losing steam.
Shares of Mahindra & Mahindra Ltd., which makes agricultural equipment such as tractors, have risen about 17% this month, the best performers among 16 Indian automakers. Shares rose 6% on Friday to a record after better-than-expected fourth-quarter earnings, with some analysts citing a likely improvement in tractor sales, driven by expectations of a normal monsoon.
Shares of Hero MotoCorp have risen 12% this month.
The sharp drop in machinery imports in the January-March quarter was an early indication of weakness in capital expenditure, Prateek Parekh and Priyanka Shah, analysts at Nuvama Institutional Equities, wrote in a note. Valuations of both consumer goods and high-investment companies have converged, which is also a reason to turn to consumer themes, they added.
–With assistance from Abhishek Vishnoi, Shinjini Datta and Advait Palepu.
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