Monsoon forecast: Looking at bumper returns

After the monetary policy, the markets were keenly awaiting the monsoon forecast of the India Meterological Department to gauge the impact on food prices and on companies dependent on the agricultural sector.

The IMD dispelled fears by forecasting a normal monsoon for June-September. Rainfall is expected to be 98 per cent of the long period average, significantly higher compared to last year's 77 per cent LPA.

A normal monsoon is good news as it helps bring down prices of agricultural commodities and eases cost pressures for companies which use these as feedstock.

"It is quite possible that under a normal monsoon, food inflation declines significantly to more than offset the hit from non-food categories," says economist Rajeev Malik of Macquarie Research.

A poor monsoon, on the other hand, pushes up agricultural prices due to dwindling food stocks. Last year's rainfall deficit saw the country's foodgrain production dip to 216.85 million tonnes (mt) in 2009-10 as compared to 233.9 mt in 2008-09.

This meant agricultural growth declined 0.2 per cent in 2009-10 from 1.6 per cent in 2008-09. Agricultural growth was a robust 4.7 per cent in 2007-08, when the country saw a normal monsoon.

Improved outlook

For India, the monsoon is critical as a large part of the arable land is dependent on rain. Kharif crops, which account for 55-60 per cent of the country's foodgrain production, are sown in June and July. Adequate rain, in terms of volumes and coverage (area-wise), is critical during this period.

"Historically, it is observed that after a drought year, we have normal monsoon. So, this year, there is fair chance of a better monsoon. While last year, the industry took a hit, the outlook for the current financial year should improve," says Rahul Mirchandani, executive director, Aries Agro.

Aries Agro, which makes nutrient-based fertilisers that help improve crop yields, is looking at 25 per cent growth in turnover in 2010-11 to Rs 175 crore (Rs 1.75 billion).

"We are expecting strong volume growth in fertilisers this year as compared to single-digit growth registered by the sector last year," says Sangeeta Tripathi, who tracks the fertiliser sector at Sharekhan.

"A normal monsoon means the demand will be higher and the payment cycle will improve, which will be marginally positive for fertiliser companies.

"We recommend a buy for Chambal Fertilisers and Coromandel International," says Prakash Gaurav Goel, an analyst at ICICI Securities. Companies like Coromondel Fertilisers generate almost 90 per cent of their revenues from the fertiliser segment.

"Deepak Fertilisers, which is largely into the chemical business, has a marginal exposure to fertilisers. Tata Chemicals and Chambal Fertilisers are among the most diversified players in this sector but still stand to gain.

Agri-inputs

Among other companies, Jain Irrigation, the largest company in the drip irrigation segment, should benefit. This is due to the fact that a normal monsoon will lead to improved demand and working capital cycle, as most of its units are sold on credit.

Companies in the tractors segment like Mahindra & Mahindra will also benefit considering that the company's revenues from the segment are 30-35 per cent of its auto segment revenues.

A normal monsoon will also mean good demand for companies in seed and crop protection segments. Advanta India, Monsanto India, United Phosphorus and Excel Crop Care are the leading companies in these two segments.