Even as the possibility of El Nino has sent alarm bells ringing, agriculture stocks have largely stood their ground.
Scrips of most companies in the space have showed moderate reactions to worries that India may witness a sub-normal monsoon in 2014 due to the emergence of El Nino, caused by abnormally warm ocean water temperatures in equatorial Pacific.
In the last four sessions since the India Meteorological Department predicted a below-average monsoon, some of the agri stocks have corrected 2-5%. However, the development has not put off buying interest in general given that the momentum in large-cap stocks has not come off.
For example, Jain Irrigation, an irrigation systems player, has rallied as much as 13% over the period. Advanta India, a seed and agritech company, and fertilizer major UPL, have also risen 14% and 16%, taking their year-to-date gains to 58% and 35%, respectively.
In 2014 so far, sugar producer Shree Renuka Sugar, and agriculture and biotech player Monsanto and Kaveri Seeds have each maintained strong gains, outdoing the 30-share benchmark Sensex, which has rallied about 6%.
After the IMD pegged the probability of deficient and below-normal monsoon rains at 23% and 33%, respectively, experts have cited the impact on inflation as well growth numbers for FY15.
According to HSBC, inflation may remain sticky in the current fiscal as the El Nino effect is likely to push up food prices while geopolitical uncertainties are likely to pump up global commodity rates.
BofAML noted that an El Nino-induced drought could result in a spike in inflation to 8-10%, and it poses a 50-75 basis point risk to India’s FY15 growth forecast of 5.4%.
However, Deutsche Bank recently pointed out that El Nino is a necessary, but not a sufficient, condition for a drought, noting that in the past there have been many years when monsoon rains have been late to arrive, but picked up subsequently, offsetting the negative impact.
?The agriculture sector matters less for overall growth, given that its relative share in the economy has reduced appreciably,? said a note by Kaushik Das, chief economist, Deutsche bank.