Photographer: Prashanth Vishwanathan/Bloomberg

Investors Call End to Drought by Picking Indian Monsoon Winners

  • M&M, Hero, Hindustan Unilever and ITC among top picks
  • CLSA says better rural demand can boost GDP expansion

Some Indian asset managers are investing in companies set to benefit from any resurgence in rural demand in a bet that one of the nation’s worst droughts in decades will soon end.

QuickTake India's Monsoon

With the monsoon season about a month away, tractor producer Mahindra & Mahindra Ltd. and two-wheeler maker Hero MotoCorp Ltd. are among stocks that are rising. Both have climbed more than 17 percent from this year’s low as the India Meteorological Department predicts rainfall at 106 percent of the 50-year average. Poor rains for the past two years squeezed incomes and hurt company earnings.

Profits have fallen in four of the last five quarters in the worst run since the financial crisis, data compiled by Bloomberg show. Good rainfall would boost farm output and improve demand for everything from motorcycles to smart-phones and tractors. CLSA Asia-Pacific Markets estimates improved rural consumption could increase gross domestic product by as much as a percentage point in the fastest-growing major economy in the world.

“Given that we had a bad monsoon last year, a normal monsoon becomes all the more important to sustain rural as well as urban demand,” Mihir Vora, the Mumbai-based chief investment officer at Max Life Insurance Co., which has $5.4 billion in assets, said in a phone interview. 

Vora said he’s bullish on the shares of companies likely to benefit from good downpours and has added to his holdings of cement and two-wheeler makers as well as micro-finance companies.

The bulk of India’s yearly showers come during the June to September monsoon. As an El Nino that triggered dry weather weakens, the chances of a La Nina -- which typically brings more rain to India -- have increased, according to forecasts from Australia’s Bureau of Meteorology. 

Strong El Ninos in the past have been followed by La Ninas that led to bumper harvests, according to the Finance Ministry.

On the other hand, if the monsoon disappoints for a third year, India would be in almost uncharted territory and investors could take fright.

While a wealthier middle class and changing eating habits have reduced the nation’s dependence on the rainy season, it still affects investor sentiment, said Sanjiv Bhasin, executive vice president at India Infoline Ltd.

“Markets are all about sentiments,” he said in a phone interview. “We are seeing green shoots of consumption growth.”

The benchmark S&P BSE Sensex rebounded from a three-week low, climbing 0.5 percent to 25,238.53 at 11:25 a.m. in Mumbai.

Here are the top stocks India’s biggest brokerages are recommending to investors:

  • Deutsche Bank: Hero MotoCorp, Mahindra & Mahindra, Dabur India Ltd., Hindustan Unilever Ltd., Bajaj Corp. Ltd., Shree Cement Ltd., UltraTech Cement Ltd., Shriram Transport Finance Co. Ltd. and Jain Irrigation Systems Ltd.

  • India Infoline: ITC Ltd., Hindustan Unilever, Hero, Eicher Motors Ltd., Ashok Leyland Ltd., National Buildings Construction Corp. and Godrej Properties Ltd.
  • Ambit Capital: Hindustan Unilever, Dabur, Colgate-Palmolive India Ltd., M&M, Hero, PI Industries Ltd., Rallis India Ltd. and Mahindra & Mahindra Financial Services Ltd.

  • Geojit BNP Paribas: ITC, Blue Star Ltd., Symphony Ltd., Hitachi Home & Life Solutions India Ltd., TVS Motor Co., Bajaj Auto Ltd., Godrej Consumer Products Ltd., Emami Ltd., Marico Ltd., Ambuja Cements Ltd., Ramco Cements Ltd.
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