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Farm sector stocks like HUL, Dabur may suffer due to El Nino effect

Stocks whose fortunes are partly tied to the farm sector such as Hindustan Unilever (HUL), Dabur and Hero MotoCorp could well underperform.

, ET Bureau|
Mar 27, 2014, 08.32 AM IST
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In a recent report, CLSA has said that “cyclical recovery should drive FY15 GDP growth to be higher than FY14. However, potential El-Nino could spoil the party. 
In a recent report, CLSA has said that “cyclical recovery should drive FY15 GDP growth to be higher than FY14. However, potential El-Nino could spoil the party. 
Brokerages and analysts have flagged off risks to investors on account of El Nino, saying stocks of companies whose fortunes are partly tied to the farm sector such as Hindustan Unilever (HUL), Dabur and Hero MotoCorp could well underperform.

ET had reported on Monday that weather scientists from Australia to the US are seeing ominous signs of a monster El Nino that heightens the risk of a drought in South Asia this year, although India's weather office has been accusing them of conspiring to rattle the country’s commodities and stock markets.

The consensus GDP growth for FY15 is close to 5.6per cent and any impact of El Nino could shave off 0.4-0.5per cent of the GDP, according to analysts.



Farm sector stocks like HUL, Dabur may suffer due to El Nino effect
El Nino, or little boy in Spanish, refers to changes in the direction of winds and the flow of warm water currents that raise the surface temperature of parts of the Pacific Ocean. It shakes up global rainfall and storm activity, causing droughts and floods in different parts of the world. In India, it coincided with droughts in 2002, 2004 and the driest monsoon in four decades in 2009.

In a recent report, CLSA has said that “cyclical recovery should drive FY15 GDP growth to be higher than FY14. However, potential El-Nino could spoil the party. We are maintaining underweight on consumer staples and rural plays could be under pressure”.

Brokerage Jefferies has said global meteorological departments have shown that El Nino risks are rising and uncertainties surrounding around whether the event actually occurs, its strength and impact on India stay high. The report says that given the average -4.7per cent historical agricultural growth during strong El Nino years, investors should pay close attention to developments. Several brokerages have been underweight on consumer companies for a while and this potential risk of a weak monsoon could further impact the outlook for rural consumption.

Sales from rural markets for auto makers such as Hero MotoCorp, Maruti and Bajaj Auto account for 30-46per cent of their volumes. In the previous eight instances of El Nino effect since 1983, the rainfall deficit had averaged 14per cent while average agricultural GDP growth dipped 1.89per cent. This year, the Southern Oscillation Index (SOI), an indicator of the El Nino impact, comes off as an index that gauges the intensity of El-Nino. It dipped to -12.5 in March 2014. A further decline, especially below -8, would mean a greater possibility of El Nino.

In a poor monsoon year, revenues of companies that are dependent on rural consumption remain under pressure. In the three years FY03, FY05 and FY10, when there was an El Nino impact, HUL reported returns of -7per cent, -3per cent and -0.5per cent, while the Sensex gave -5.1per cent, 14per cent and 13per cent, respectively, in the same period. HUL derives over 40per cent of revenues from imrural markets.

 


Other firms such as Hero MotoCorp and Dabur too have underperformed during the same period. Considering that HUL and Dabur are trading at an expensive valuation of 30 times and 27 times, respectively, taking into account one-year forward earnings, El Nino could adversely impact their stocks. Interestingly, during the all three previous poor monsoon years, ITC had outperformed the markets.

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