Mumbai: Fortunes of several Indian businesses are still linked to the monsoon.
More than 60% of India’s population is still directly or indirectly dependent on agriculture for a living; in turn, agriculture in most parts of the country is dependent on the monsoon.
Although the share of agriculture in India’s economy has fallen from one-fourth few years ago to under one-fifth now, the monsoon continues to be a relevant variable. It continues to have an effect on the performance of companies.
A good monsoon means more sales and a bad monsoon usually means the reverse.
Until a decade ago, the Reserve Bank of India (RBI) used to call one of the two credit policies it announced in the course of a year, the “busy season” credit policy.
The other was called the “slack season” one.
Former RBI governor C. Rangarajan rechristened the two policies as the “annual” policy, which was announced in April, and a “mid-year review”, announced in October. Before he did that, the April policy was the slack season policy and the October policy, the busy season one. The historic reason behind this was the phenomenon of rising credit after the harvest season in October and the slack in credit growth in the beginning of the year.
Despite the change in the name of two policies—these days, RBI announces its credit policy every quarter—agriculture still plays a major role in deciding the flow of credit in India. Credit growth picks up in the second half of the year buoyed by good monsoon and harvest. In the first half, it can even dip.
For instance, this year, between April and the first week of June, the overall credit in the banking system has gone down by more than Rs35,000 crore.
This, despite the decline in contribution of agriculture to the country’s gross domestic product (GDP). In 1999-2000, agriculture accounted for close to 23% of India’s GDP. In 2006-07, the corresponding figure was 18.46%(at constant prices).
The cement exception
The cement business is one where there used to be a negative relationship between the monsoon and sales. It has managed to break the cycle.
Cement prices, which normally used to drop during the monsoon, have remained stable in the last three years. This year is no exception, thanks to demand from the infrastructure and construction industry. Earlier, prices used to fall by 5-7% during monsoon due to slowdown in construction activities.
“Infrastructure and heavy construction projects continue through monsoon, as the builders need to meet their deadline. Only individual house builders don’t carry on with their construction, but the demand from them is limited,” said H.M. Bangur, managing director of Shree Cement Ltd and vice-president of the Cement Manufacturers’ Association of India.
The nationwide average cement price is around Rs227 for a 50kg bag and the retail price in the country’s largest market, Mumbai, is above Rs250. “There won’t be any slump in cement prices. Prices go down if there is inventory build up. There is no such thing happening. So the prices will remain stable,” says Rakesh Arora, an analyst tracking the cement sector for Macquarie Research (India) Pvt. Ltd.
The capacity utilization of cement plants has been above 80% for the last three years and it is estimated that the number will cross 90% in 2007, according to a recent study by Citigroup.
Consumer product firms say that customers buy more goods after a good monsoon, which has a direct influence on farm income. A senior executive at Godrej Consumer Products Ltd (GCPL) says that a good monsoon stimulates commercial activity in rural areas, with usually attendant multiplier benefits. “For obvious reasons of affordability, there is a direct corelation between monsoon and our sales. Although, there is a lag period before it manifests itself,” says GCPL executive director and president Hoshedar K. Press.
Another executive at a consumer products firm says that the monsoon, while important, is losing some of its relevance.
A good monsoon in one year does not make a difference, adds V.S. Sitaram, executive director (consumer care division) Dabur India Ltd. “It is, in fact, the sustained development of the rural economy that has a better impact on consumer spending. While monsoons still remain a substantial force, it’s getting weaker now.”
Consumer product firms say there is greater linkage between urban and rural India with members of several rural households migrating to urban areas. They add that improved irrigation and water distribution are making farmers less dependent on the monsoon.
“Dependence on rain itself as a source of irrigation has gone down and better methods of retaining rainwater have evolved,” says Milind Sarwate, chief (HR and strategy), Marico Ltd.
Analysts say the performance of consumer goods companies is not only linked to the proportion of sales they get from rural and urban markets, but also on the growth of these markets. Around 35% of GCPL’s total sales come from the rural market; for Dabur India, the proportion is 50%. “The sales may be high in the rural market, but it is the urban market which is growing due to the emergence of modern retail,” says Nirjhar Handa, senior analyst, Infinity.com Financial Securities Ltd, a Mumbai-based brokerage firm.
Bikes, tractors and drugs
For scooter and motorcycle manufacturers, roughly 35-40% of demand comes from rural and semi-urban markets and the monsoon is the main driver for demand in this market as the income of consumers are largely dependent on agricultural output, says Umesh Karne, senior research analyst with Emkay Share and Stock Brokers Ltd. “Income from the crop comes six months after the monsoon. So there is 6-10 months lag effect on the purchasing power of rural and semi-urban consumers,” he adds.
Bikes with an engine capacity between 75cc and 125cc are the largest selling two-wheelers in rural and semi-urban markets. Hero Honda Motor Ltd sold more than three million such bikes in 2006-07; Bajaj Auto Ltd and TVS Motor Company Ltd sold more than 1.4 million and seven lakh bikes in the same period.
Sales of tractors are also directly linked to the monsoon. “Almost 95% of tractor sales come from the rural and semi-urban market. If the monsoon is bad, then sales go down by around 25%. A good monsoon, on the other hand, can boost the sales by 50%,” says industry body Tractors Manufacture’s Association president L.D. Mittal. In 2006, around 263,000 tractors were sold in India.
The domestic drug industry views the monsoon with hope; usually, sales of anti-infectives increase significantly in this period. “Almost all drug firms have a range of anti-infective products in their portfolio and the sales of these products grow significantly during the monsoon,” says Raghavendra Rao, managing director of Orchid Chemicals and Pharmaceuticals Ltd.
“We see an increase in the number of water-borne diseases, such as gastroenteritis, jaundice, typhoid and dysentery,” says M. Masand, CEO of Jaslok Hospital and Research Centre in Mumbai. The incidence of certain other infectious diseases that are not water-borne also increases during the monsoon. These include upper respiratory tract infections, dengue, malaria and leptospirosis (which is an acute infection needing specialized medical care).
However, the domestic pharmaceutical industry’s dependence on monsoon has diminished compared with in the past—this is because Indian firms have forayed into international markets and also increased their focus on drugs such as cardiovascular drugs.
The dependence of some sectors on monsoon is on the wane, but overall, it remains a relevant factor that can boost of erode sales.
This year, rival weather models have come out with near-identical forecasts with respect to an evolving south-west monsoon in India with a consensus on above-normal rainfall. The UK Met Office and the Japanese Meteorological Agency have projected a favourable monsoon scenario in India and the International Research Institute for Climate and Society at Columbia University has maintained its outlook for an above normal rainfall (up to +38%) for the June to September season.
Shilpa Shree and Jeetha D’Silva also contributed to this story.