Monday, June 21, 2010

INDIA STRATEGY: Is it raining enough s enough?

Monsoon 8% below normal: The India Meteorological Department (IMD he IMD) reported that rains in the week end ended ed June 16 were 8% below normal normal. It has also reported that there may be a temporary weakening of the monsoon over the next week week, with no major advance over central and eastern India. Although it is still early days, the q question is: uestion is this a cause for concern? Maybe not not, because there’s no clear pattern pattern; however ; however, monsoon worries may heighten inflation expectations and can dampen sentiment sentiment.

There’s no clear pattern; June does not set the pattern for the entire season season...: ...: Normal rains are defined as falling within 10% of the long long-term average normal. Since 1901, there have been 35 instances when June rainfall has fallen short by more than 10%, and on 24 of these instances the overall monsoon season turned out normal. Also, i in the last 25 years, there have n been five ins instances when June received above tances above-normal rainfall while the remaining months (and the en entire season) were rendered rain tire rain-deficient.

…b but can ut dampen sentiment and increase inflation worries worries.. ..: Food ood inflation remains the key concern for the government government, and it has been banking
on a normal monsoon for food prices to ease ease.

…and can lead to RBI hiking rates faster than expected… expected…: The latest inflation point of 10.2% YoY was higher than expected, impacted mainly by rise in prices of primary articles articles, while food inflation eased , eased. However, a deficient monsoon could raise worries about a rebound in food inflation. While there is a general expectation of a 2 25 bps hike at 5 the next meeting, any concerns around a persistent high level of inflation can make RBI move on rates much faster than expected expected.

... can also slow down private consumption consumption: High inflation and rising rates could strike a double whammy for priv private ate consumption consumption, particularly urban , consumers. Rural demand was resilient last year but could come under pressure in case monsoons were to worsen.

While it is too early to judge, a deficient monsoon can impact agricultural (Khari Kharif) output, inflatio f) inflation, sentiment n, and ultimately private consumption consumption.
Per Persistent high inflation could sistent also prompt RBI to raise rates faster than expected. Such a scenario could impact early cycle consumer discretionary sectors such as autos and telecom and interest rate rate-sensitive real estate. We believe that a an interesting play within consumer staples would be to switch n from HUL (HUVR IN; INR257; TP 210; Underperform) to ITC (ITC IN; INR294; TP 335; Outperform). In past rain rain-deficient years years, we have seen HUL underperformi underperforming relative to the market during the June ng June-September period and ITC outperforming the market (see Fig Figs 5 and 6) 6).

To read the full report: INDIA STRATEGY