Nomura’s Mihir Shah: Below-Normal Monsoon Will Not Hinder Rural Demand

India’s consumer sector is navigating a challenging monsoon season, with forecasts indicating a weaker-than-expected pattern exacerbated by El Niño conditions. However, Nomura’s Mihir Shah asserts that concerns over rural demand are overstated, citing robust reservoir levels—15% above the 10-year average—and improvements in irrigation infrastructure as significant mitigating factors. While El Niño’s influence is anticipated to intensify toward the end of the monsoon, its impact may be less severe given its current weak-to-moderate status and the potential for a positive shift in the Indian Ocean Dipole, which could balance rainfall conditions.

On the consumption front, Shah noted a narrowing gap between rural and urban demand, with urban markets displaying early recovery signs while rural consumption stabilizes. The expectation is that rural demand will remain rangebound rather than accelerating, especially as staple goods experience modest pricing increases. This evolving landscape indicates a gradual shift in consumption patterns, positioning the rural economy to absorb shocks better than in previous years due to decreased dependence on kharif output.

From an individual stock perspective, Shah highlighted ITC as a company facing immediate challenges, primarily due to a recent tax hike that has not been fully passed on to consumers. This has led to a projected decline in both volume and EBIT for its cigarette business in the near term. Conversely, Asian Paints is positioned positively with anticipation of high single-digit to early double-digit volume growth, supported by favorable pricing dynamics and a favorable operational backdrop compared to last year’s disruptions.

Shah’s analysis reveals a cautious yet optimistic outlook for India’s consumption sector, emphasizing structural resilience within rural demand and varying performance trends among individual companies. As the monsoon season progresses, investors should remain vigilant regarding the differentiated impacts of weather patterns and regulatory changes on sector performance, while focusing on companies with solid positioning in this evolving market landscape.

Source: The Economic Times

(Expert Note: This report was prepared by the Wealthova team.)