A heavy monsoon season is great news for these Indian stocks

Stocks of Indian firms that earn a large chunk of their revenues from the nation’s hinterland are showing signs of a revival, as traders bet that bountiful monsoon rains will lead to better crop yields and boost rural demand.

Motorcycle manufacturers, farm-equipment makers and producers of fast-moving consumer goods have 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 major consumer goods firms have predicted stronger business ahead.

The Nifty FMCG Index has risen 1.5 per cent so far in May, beating the benchmark NSE Nifty 50 Index by more than two percentage points. It underperformed in each of the previous six months.

“The market is expecting a bounce back in rural demand from a good monsoon,” said Sahil Kapoor, a strategist at DSP Mutual Fund in Mumbai. If predictions of an above-average monsoon this year pan out, it will help agricultural output and support rural income, he said.

A recovery in rural stocks is also welcome news for India’s broader stock market whose stellar rally in recent years was disproportionately spurred by investment-heavy firms benefiting from the government’s higher infrastructure spending. Further, bountiful showers can aid the central bank’s efforts to cool inflation by curbing gains in food prices, thereby improving prospects for India’s economic growth and corporate earnings.

Hindustan Unilever Ltd — seen as a bellwether for consumer appetite in India as its products are sold in every part of the country — has said it sees demand gradually improving. Rival Dabur India Ltd. has echoed the same sentiment, while motorcycle maker Hero MotoCorp Ltd has said it sees most of its new vehicle inquiries now coming from rural areas.

“We think rural economy is starting to come back,” said Rajeev Agrawal, a fund manager at New-York based DoorDarshi India Fund. “This is reflected in strong two-wheeler sales.”

Sales of motorcycles and scooters in India rose 33 per cent on year last month, according to data from the Federation of Automobile Dealers Associations. More broadly, fast-moving consumer goods companies registered sales growth of 7.6 per cent year-on-year in rural areas in the quarter ended March, according to Emkay Global Financial Services Ltd.’s research that cites data from Nielsen. That’s the first time the measure outpaced urban growth in three years.

To be sure, there are question marks about the momentum and breadth of the rural sector’s demand recovery, given a low base for earnings comparison and the fact that some firms have seen volumes benefiting due to price cuts.

“This is still a hope trade,” said DSP Mutual Fund’s Kapoor. “There hasn’t been a meaningful recovery in earnings or sales volumes so far.”

To analysts at Morgan Stanley, cyclical businesses are still leading India’s growth and that should result in defensive sectors lagging. “We are still mid-way through this cycle for staples and expect them to continue to underperform and de-rate,” they wrote in a May 9 note.

Still, investors’ appetite for stocks tied to the rural sector has strengthened amid growing signs that India’s investment-propelled growth may be losing steam.

Shares of Mahindra & Mahindra Ltd., which makes farm equipment such as tractors, are up about 17 per cent this month, the top performers on a gauge of 16 Indian automakers. The stock surged 6 per cent on Friday to a record after better-than-expected fourth-quarter earnings, with some analysts citing likely improvement in tractor sales ahead driven by expectation of normal monsoons.

Hero MotoCorp’s shares are up 12 per cent so far this month.

The sharp drop in machinery imports in the January-March quarter was one of the early indications of capital expenditure weakness, Prateek Parekh and Priyanka Shah, analysts at Nuvama Institutional Equities, wrote in a note. Valuations of both consumer goods and capex-heavy firms have converged, and that is also one reason to pivot toward consumption themes, they added.