Below average monsoon takes toll on auto, FMCG stocks

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Shares of automobile manufacturers, consumer-oriented companies, and agriculture-related firms, could glide as a below-average monsoon this year may harm their quarterly earnings.India received 14% below-normal rains between June and September, as the strongest El Nino in almost two decades left vast regions of land dried, affecting crops. Shares of Hero MotoCorp, M&M and HUL BSE0.15 % could face pressure as rural income and usage may get impacted by a sub-par monsoon.

The contribution of rural consumers to sales of these firms is quite significant. The earnings of two-wheeler and FMCG companies for the September quarter are likely to remain dejected due to a below-normal monsoon. The management narration will be crucial, post the quarterly results. Any negative admission due to poor rains will further bring pressure on the stocks.Auto firms such as Hero MotoCorpBSE 0.74 % and Bajaj Auto, have a lot riding on the monsoon, as nearly half the two-wheeler sales come from semi-urban and rural India.

Aweak monsoon will also directly impact sales of farm equipment, affecting companies such as M&M, which gets almost a third of its revenue from tractor sales.Among automobile stocks Hero MotoCorp has dropped 23% so far this year, TVS MotorBSE -0.26 % declined 17%, while Bajaj AutoBSE 0.18 % has fallen about 6% over the same period. Consumer-oriented companies, automobile manufacturers may remain under pressure in the interim.

However, over the next 6-12 months, they may outperform as markets will bet on recovery of the rural economy, along with improvement in margins from falling commodity prices. Among the FMCGstocks, ITC has dropped 10% so far this year; while HUL gained 7% the ET FMCG Index has gained 1.1% over the same period. FMCG stocks are currently trading at higher valuations and investors should expect a downside if the June-September results turn out to be weak.

Among the fertiliser firms, Coromandel Int’l has dropped 50% so far this year; Zuari Agro declined 43.5%, GSFC 35%, while National Fertiliser has weakened 32%. Rural consumption has dropped considerably and this is adversely impacting sales growth of automobile, FMCG and agriculture companies with BNP ParibasBSE 0.00 % Mutual Fund.

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