At this juncture, when most macroeconomic indicators are showing signs of distress, surplus monsoon is manna from heaven as it will boost agri-sector income in the near future.
The distress in the rural economy may ease in the coming months as expectations for a good Rabi crop has grown stronger, thanks to a bumper southwest monsoon this year, which officially ended at a 25-year high.
India Meteorological Department (IMD) said that the country has recorded the highest monsoon rains since 1994, terming it as 'above normal' as the season officially ended on September 30.
"Quantitatively monsoon seasonal rainfall was 110 percent of its Long Period Average (LPA)," the IMD said.
LPA is the average rainfall between 1961 and 2010, which is 88 cm.
Monsoon is still active in several parts of the country and its withdrawal is likely to begin from northwest India around October 10, IMD said, adding that this is the longest recorded delay in withdrawal of the monsoon. Usually, monsoon starts withdrawing beginning September 1 from west Rajasthan.
Monsoon's strong show has raised the expectations of a good Rabi crop next year. This, along with the government's increased spending in rural India, is expected to ease the distress in the rural economy.
At this juncture, when most macroeconomic indicators are showing signs of distress, surplus monsoon is manna from heaven as it will boost agri-sector income in the near future.
"The revival in government spending in rural India from July as well as the settlement of major dues to the private sector (Rs 50,000 crore of Rs 70,000 crore) amid expected good Rabi crop are likely to help relieve some stress in the rural economy in coming months," said Elara Securities in a report.
Moreover, the renewed push for increasing PM Kisan transfers is also expected to provide much needed reflation in rural economy.
For the market, nothing can be more important than a healthy economy. There are some stocks that look in a sweet spot because of the increased prospects of easing rural distress. Let's take a look at some of them.
Rallis India | Buy | Target price: Rs 206
A subsidiary of Tata Chemicals that covers 80 percent of the districts in the country, it has a wide reach for its pesticides, seed treatment and other agri products and services.
"We believe a better than expected monsoon will have a positive effect on the stock and at present
levels, it is looking attractive as per risk and reward," said the brokerage.
Mahindra & Mahindra | Buy | Target price: Rs 715
A lot of steps have been taken by the government to improve the demand in rural and urban areas while at the same time various policies like Kisan Samman Nidhi, boosting the agricultural income to double in coming years is going to improve the demand in the long-term.
Also, the low-interest-rate environment should revive the demand in the coming months. M&M, country's largest tractor manufacturer, foraying in farm machinery ecosystem, should benefit from this.
"The stock is available at 50 percent of its long-term uptrend and has an attractive risk-reward at present levels. We believe the stock is a buy around Rs 550 - 500 for an upside move to Rs 640 - 715," said the brokerage.
UPL | Buy | Target price: Rs 740
One of the leaders in the industry with total crop solutions with a major presence in domestic as well as international market. It has its solutions from seeds to crop protection to post-harvest services.
There was a drop in profit due to higher input cost and acquisition of Arysta Life, making UPL one of the top 5 agricultural solutions providers with $5 billion in revenue.
ITC | Buy | Target price: Rs 352
"With strong operating cash flows, continuous capacity expansions across businesses and a healthy balance sheet, we have a positive view on the company over medium to long-term," said the brokerage.
Finolex Cables | Buy | Target price: Rs 478
Finolex looks attractive due to its leading position in electrical cables and debt-free status. However, success in its FMEG division and significant improvement in JVs are key monitories.
FY19 revenue and EBITDA grew 9 percent and 7 percent, respectively. In terms of valuations, the brokerage said it finds the stock reasonably valued.
Swaraj Engines | Buy | Target price: Rs 2,139
"We continue to expect positive growth for the tractor industry in FY20 driven by government subsidies and expect Swaraj Engines to benefit from expected state subsidy schemes also," said the brokerage.
The brokerage expects a 10 percent volume growth for Swaraj Engines and a stable margin. It also expects a 10 percent CAGR in earnings over FY19-21 to Rs 99.8 crore. "With the company's lean cost structure and strong balance sheet, we recommend a buy," said the brokerage.
Voltamp Transformers | Buy | Target price: Rs 1,846
On the strong order book, the brokerage expects the company's sales to register a 29 percent CAGR over FY19-21. The order book registered a strong growth of about 56 percent year-on-year (YoY), with order inflows growing 81 percent in Q1.
"With the plants operating at nearly 90 percent capacity, better utilisations would pave the way to higher operating leverage. Hence, softening commodity costs, coupled with higher operating leverage assure of further margin improvement in FY20 and FY21.
"We expect margins to expand. This should result in a strong, 31 percent, earnings CAGR over FY19-21. With greater revenue assurance as well as the strengthening balance-sheet, we maintain our buy recommendation," said the brokerage.
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