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Rural-Focused Indian Stocks Rebound as Traders Bet on Strong 2024 Monsoon

Heavy Monsoon

Stocks of Indian companies with significant revenue from rural areas are showing signs of recovery. Traders are optimistic that abundant monsoon rains will lead to improved crop yields and increased rural demand.

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Astrology

Manufacturers of motorcycles, farm equipment, and fast-moving consumer goods have seen their stocks rally due to predictions of timely and above-normal monsoon rains in 2024. This follows two years of severe and unseasonal heat that severely impacted Indian agriculture. Sales in rural regions are on the rise, and several major consumer goods companies are forecasting stronger business ahead.

The Nifty FMCG Index has increased by 1.5% in May, outperforming the benchmark NSE Nifty 50 Index by over two percentage points, reversing a six-month trend of underperformance.

“The market is anticipating a resurgence in rural demand from a favorable monsoon,” said Sahil Kapoor, a strategist at DSP Mutual Fund in Mumbai. An above-average monsoon would boost agricultural production and support rural incomes, he added.

A recovery in rural stocks is also promising for India’s broader stock market, which has recently been driven by investment-heavy firms benefiting from the government’s increased infrastructure spending. Additionally, abundant rainfall can help the central bank’s efforts to control inflation by stabilizing food prices, thereby enhancing prospects for economic growth and corporate earnings.

Hindustan Unilever Ltd., a key indicator of consumer demand in India, has reported a gradual improvement in demand. Similarly, Dabur India Ltd. and Hero MotoCorp Ltd. have noted increasing inquiries from rural areas for their products.

“We believe the rural economy is beginning to rebound,” said Rajeev Agrawal, a fund manager at New York-based DoorDarshi India Fund, highlighting strong two-wheeler sales as evidence.

Motorcycle and scooter sales in India increased by 33% year-on-year last month, according to the Federation of Automobile Dealers Associations. Additionally, fast-moving consumer goods companies experienced a 7.6% year-on-year sales growth in rural areas in the quarter ending March, the first time in three years this measure has outpaced urban growth, as reported by Emkay Global Financial Services Ltd., citing Nielsen data.

However, there are still concerns about the sustainability and breadth of the rural demand recovery, given a low base for earnings comparison and some companies benefiting from price reductions.

“This is still a speculative trade,” cautioned DSP Mutual Fund’s Kapoor. “There hasn’t been a significant recovery in earnings or sales volumes yet.”

Morgan Stanley analysts suggest that cyclical businesses are still driving India’s growth, which may result in defensive sectors lagging. “We are still in the middle of this cycle for staples and expect them to continue underperforming and de-rating,” they wrote in a May 9 note.

Despite these concerns, investor interest in rural sector stocks has grown as India’s investment-driven growth shows signs of slowing.

Shares of Mahindra & Mahindra Ltd., a major farm equipment manufacturer, have risen about 17% this month, making them the top performers among 16 Indian automakers. The stock surged 6% on Friday to a record high following better-than-expected fourth-quarter earnings, with analysts citing anticipated improvements in tractor sales due to expected normal monsoons.

Hero MotoCorp’s shares have increased by 12% this month.

The significant drop in machinery imports during the January-March quarter was an early indicator of weakened capital expenditure, according to Prateek Parekh and Priyanka Shah, analysts at Nuvama Institutional Equities. Valuations of both consumer goods and capital expenditure-heavy firms have converged, prompting a shift towards consumption themes, they noted.

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