Stocks of Indian firms that earn a large chunk of their revenues from the nation’s hinterland are showing signs of a revival, as traders bet that bountiful monsoon rains will lead to better crop yields and boost rural demand.

Motorcycle manufacturers, farm-equipment makers and producers of fast-moving consumer goods have rallied following forecasts of timely and above-normal monsoon rains in 2024, after extreme and unseasonal heat wreaked havoc on Indian agriculture in the last two years. Sales volumes in rural areas are improving and several major consumer goods firms have predicted stronger business ahead.

The Nifty FMCG Index has risen 1.5% so far in May, beating the benchmark NSE Nifty 50 Index by more than two percentage points. It underperformed in each of the previous six months.

“The market is expecting a bounce back in rural demand from a good monsoon,” said Sahil Kapoor, a strategist at DSP Mutual Fund in Mumbai. If predictions of an above-average monsoon this year pan out, it will help agricultural output and support rural income, he said.

A recovery in rural stocks is also welcome news for India’s broader stock market whose stellar rally in recent years was disproportionately spurred by investment-heavy firms benefiting from the government’s higher infrastructure spending. Further, bountiful showers can aid the central bank’s efforts to cool inflation by curbing gains in food prices, thereby improving prospects for India’s economic growth and corporate earnings.

Hindustan Unilever Ltd. – seen as a bellwether for consumer appetite in India as its products are sold in every part of the country – has said it sees demand gradually improving. Rival Dabur India Ltd. has echoed the same sentiment, while motorcycle maker Hero MotoCorp Ltd. has said it sees most of its new vehicle inquiries now coming from rural areas.

“We think rural economy is starting to come back,” said Rajeev Agrawal, a fund manager at New-York based DoorDarshi India Fund. “This is reflected in strong two-wheeler sales.”

Sales of motorcycles and scooters in India rose 33% on year last month, according to data from the Federation of Automobile Dealers Associations. More broadly, fast-moving consumer goods companies registered sales growth of 7.6% year-on-year in rural areas in the quarter ended March, according to Emkay Global Financial Services Ltd.’s research that cites data from Nielsen. That’s the first time the measure outpaced urban growth in three years.

To be sure, there are question marks about the momentum and breadth of the rural sector’s demand recovery, given a low base for earnings comparison and the fact that some firms have seen volumes benefiting due to price cuts.

“This is still a hope trade,” said DSP Mutual Fund’s Kapoor. “There hasn’t been a meaningful recovery in earnings or sales volumes so far.”

To analysts at Morgan Stanley, cyclical businesses are still leading India’s growth and that should result in defensive sectors lagging. “We are still mid-way through this cycle for staples and expect them to continue to underperform and de-rate,” they wrote in a May 9 note.

Still, investors’ appetite for stocks tied to the rural sector has strengthened amid growing signs that India’s investment-propelled growth may be losing steam.

Shares of Mahindra & Mahindra Ltd., which makes farm equipment such as tractors, are up about 17% this month, the top performers on a gauge of 16 Indian automakers. The stock surged 6% on Friday to a record after better-than-expected fourth-quarter earnings, with some analysts citing likely improvement in tractor sales ahead driven by expectation of normal monsoons.

Hero MotoCorp’s shares are up 12% so far this month.

The sharp drop in machinery imports in the January-March quarter was one of the early indications of capital expenditure weakness, Prateek Parekh and Priyanka Shah, analysts at Nuvama Institutional Equities, wrote in a note. Valuations of both consumer goods and capex-heavy firms have converged, and that is also one reason to pivot toward consumption themes, they added.

New Delhi:

India’s GDP is likely to touch $5 trillion over the next four years and will overtake Japan and Germany to become the third largest economy by 2027, Jefferies said on Wednesday.

In a note, the investment banking company said that India will become nearly a $10 trillion market by 2030 and that it will be “impossible” for large global investors to ignore the country.

“From the ninth largest economy a decade back, India has now become the 5th largest economy with a nominal GDP of $3.4 trillion. On a PPP basis, the GDP is already much higher at $13.2 trillion, making it the third largest economy in the world,” the Jefferies said.

It said that India’s GDP grew even as there was an impact of several major reforms like bankruptcy law, GST implementation, Real Estate Regulation Act (RERA) and demonetization.

These reforms were “good” for the long-term but “adversely impacted” near-term growth, it added.

“India is not only projected to grow at 6% over the next five years, the country will also be a standout in a world where most large economies are expected to see their growth rates decline.

“We believe that rising growth outperformance, particularly against the developed world, should help India climb up the world’s GDP ranks quickly to the third spot before this decade ends,” Jefferies said.

India’s Market Cap To Become $10 Trillion By 2030

Jefferies said that it believes that Indian equity markets will continue to deliver 8%-10% dollar returns over the next five to seven years.

“Structural domestic flows arising from shift of savings to equities and potential listing of large unicorn in India can drive the market cap past $10 trillion by 2030,” the company said.

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“Even though India is fifth largest in terms of market cap, its ranking in the Bloomberg World Index is eighth with a weight of just 2.0% which, in our view, means there is tremendous scope for foreign investors to increase investment into the fastest growing country in the world,” it added.

A rise in country weight in a global fund could make Indian stocks a must-have for a much more diverse set of equity investors, Jefferies said.