Monsoon stocks: These eight companies are likely to benefit from normal rains

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Amid the ongoing uncertainty due to the Covid-19 pandemic, investors will now focus on the monsoon which may play a crucial role in deciding the direction of the market in the near-term. The Indian Meteorological Department (IMD) in April projected that the southwest monsoon rainfall over India is most likely to be normal this year.

The seasonal rainfall is likely to be 98% of the long period average (LPA) of 880 mm for the entire country. IMD declares a monsoon season ‘normal’ when rainfall is between 96% and 104% of the LPA. In the last two years, India recorded excess rainfall of 110% and 109% of LPA during the monsoon season.

Monsoon and stock market

A normal monsoon is considered favourable for rural India where the majority of the population is dependent on agricultural-related activities. In India, around 58% of employment comes from agriculture and contributes almost 18% to the country’s gross domestic product (GDP).

While sharing his views on monsoon and its impact on the stock market, G Chokkalingam, Founder, Equinomics Research and Advisory, said: “Directly for the stock market as a whole it doesn’t make any dominant impact as a share of the agricultural sector is just around 18% and secondly the number of stocks representing from the agricultural sector in the stock market is quite low.

“However by reducing food inflation significantly it can help the overall markets by containing headline inflation. As far as individual stocks are concerned most of the agri related stocks are trading at historically high valuations. Hence, investors may look at FMCG stocks which have relatively underperformed recently. They would gain from improved rural demand thanks to good monsoon and another record level of food grain production expected.”

With a return of 2%, the BSE FMCG index has underperformed the benchmark BSE Sensex (up 3.79%) on a year-to-date (YTD) basis till May 20. Other consumer-oriented indices like BSE Consumer Durables and BSE Auto have gained 7% and 10%, respectively, YTD.

On the other hand, fertiliser majors including Fertilisers & Chemicals Travancore, Mangalore Chemicals & Fertilizers and Nagarjuna Fertilizers have advanced over 100% on a year-to-date basis. Rama Phosphates, Southern Petrochemicals, Deepak Fertilisers, National Fertilizers, Gujarat Narmada Valley, Gujarat State Fertilizers, Rashtriya Chemicals and Basant Agro Tech have gained between 50%-100% during the same period.

Stocks to buy

Market analysts AK Prabhakar and head of research at IDBI Capital Market believes that fertiliser, two-wheeler (entry-level), tractors, FMCG, agro-chemicals normally benefit from the normal monsoon. However, FMCG has underperformed this year as people are not spending much due to Covid-19.

He believes that stocks like Coromandel International, Mahindra & Mahindra, Hero MotoCorp, BayerCorp, Dhanuka Agritech and Sumitomo Chemical may benefit from the normal monsoon. However, Chokkalingam is bullish on Jyothy Laboratories and Hindustan Unilever.