Agriculture-related stocks to reap normal monsoon bounty
Experts caution that much will depend on govt response to second wave, spread of rains
Athird consecutive year of normal monsoon in 2021, as predicted by the Indian Meteorological Department (IMD) and private weather forecaster Skymet, is likely to keep the good times going for agri-related companies such as pesticides, fertilizers, farm equipment makers, say analysts.
They, however, caution that the bounce will depend on government policies as the country is facing the second wave of Covid-19 and because of inflation concerns, given the steady rise in prices of key commodities. The temporal and spatial distribution of the monsoon, experts say, will also remain crucial.
“As of now, we expect the agricultural gross value added (GVA) to report a moderate growth of 2 per cent in financial year 2021-22 (FY22), following two years of above average rainfall and healthy output expansion. A normal monsoon should also help to rein in food inflation, although the global trend in the prices of edible oils, as well as domestic demandsupply disruptions for perishable items such as vegetables, will continue to play a critical role,” says Aditi Nayar, chief economist at ICRA.
Since April 17, 2020, most agri-related stocks have done well at the bourses. Rama Phosphates, Deepak Fertilizers, Fertilisers and Chemicals Travancore (FACT), Harrisons Malayalam, Astec Lifesciences, and Gujarat Narmada Valley Fertilizers & Chemicals have rallied 113-300 per cent, ACE Equity data show. Comparatively, the S&P BSE Sensex, S&P BSE Midcap, and S&P BSE Smallcap indices have risen 54 per cent, 70 per cent, and 94 per cent, respectively.
“Agri-related, especially pesticide & fertilizer, chemicals and farm equipment companies have done well in the past year despite Covid-related headwinds. The trend is likely to continue in 2021, if the monsoon is good. Fast moving consumer goods (FMCG) may not do that well, as their fortunes partially depend upon consumption patterns, which are yet to pick up meaningfully in urban India. Coromandel Fertilizers, Bayer Crop, Dhanuka Agro, Chambal Fertilizers, and farm equipment companies (tractor) are the ones I am bullish on,” says A K Prabhakar, head of research at IDBI Capital.
That said, IMD’S prediction record is mixed. In the past 10 years, its forecast has been true 70 per cent of the time, data shows. However, as both IMD and Skymet have forecast a normal monsoon, the probability of it does increase, experts say.
“A normal monsoon will certainly boost farm sentiments. However, global food prices are the most critical determinant of rural incomes and remain a key monitorable going ahead. International food prices have risen (owing to supply disruptions). However, given the elevated levels of inventories, this surge is likely to be temporary and not a structural upcycle,” wrote analysts at Edelweiss Securities in a recent note.
Agricultural activity, according to recent channel checks by Prabhudas Lilladher, is expected to continue at a strong pace in FY22 given remunerative crop prices and healthy water reservoir levels. Besides, agrochemical and fertilizer companies have also announced price hikes starting April.
“The upcoming Kharif season seems to be stable from business perspective for agriculture/agriinput companies. Retain Bayer India in model portfolio given expected benefits from normal monsoon, higher sowing and robust agri sentiment,” says Amnish Aggarwal, head of research at Prabhudas Lilladher.
“Since agri produce is considered essential, related activities are likely to go on even if at a slower pace (due to rising Covid infection) as compared to urban India, where most services come to a standstill in a lockdown. This was witnessed in 2020 as well — and 2021 will be no different,” says Amarjeet Maurya, assistant vice-president for mid-cap research at Angel Broking.