Key notables in May ’19 were: (i) Primary sales of fertilisers declined due to monsoon delay and unfavourable base, (ii) reservoir levels in Western India are at a low level of 10% (10-year average: 17%), (iii) spread between rural wage growth and inflation remains above 2% indicating higher ‘real income growth,’ (iv) tractor sales declined 15.7% y-o-y due to limited capex by farmers owing to agri stress and (v) 12.5% sowing deficit in kharif 2019 season.
We believe Godrej Agrovet will be most impacted by the stress in agri sector as it is chiefly dependent on Western India. Also, margin pressure on dairy segment and lower palm oil prices will hurt its earnings in FY20. We also believe Kaveri Seed will be impacted if sowing is delayed even in July, 2019.
Fertiliser sales declined in May’19: The primary sales of all fertilisers (ex- DAP) declined, y-o-y due to (i) delayed monsoon and postponement of agri sowing and (ii) unfavourable base. The fertiliser off-take declined y-o-y and is expected to recover in coming months .
Lower reservoir levels in western India: Pan-India reservoir level in April ’19 was 17% compared to a 10-year average of 18.2%. The reservoir level in Western India is at an alarmingly low level of 10% (10-year average: 17%).
Sowing deficit of 12.5% y-o-y: The sowing data indicates deficit of 12.5% y-o-y and 14.2% against normal sowing. Chief reason is delayed monsoon. Excluding sugarcane, the sowing deficit is 22% y-o-y. The sowing deficit for major crops such as rice and cotton was 31.8% and 12.1%, respectively.
Rural inflation<rural wage growth: We note the monthly spread between rural inflation and rural wages is expanding, indicating higher ‘real’ income growth. Inflation was 1.9% in April ’19 and rural wage growth was 4.2% y-o-y.
Agro commodity and ancillary product prices in May ’19: Prices of key agri commodities—cotton and wheat— have inched up 5.1% and 12.4%, respectively y-o-y. International prices of skimmed milk powder (SMP) and shrimp have inched up y-o-y but domestic prices of eggs are still in deflation zone.
Investments–A mixed bag: We note growth in agri credit and tractor sales are indicators of capex (investments) by farmers. Agri credit growth was 7.9% in April ’19 compared to 7.9% in Mar’ 19 and 5.9% in Apr’ 19.
Decline in tractor sales: The off-take of tractors declined 15.7% y-o-y in May ’19. We believe the two key reasons for decline in tractor sales are: (i) Agri crisis and (ii) high base. May ‘19 was third consecutive month of over 15% volume decline.
Delayed monsoon: The monsoon deficiency at the end of 29th June 19 was 34%, pan-India. We believe late start as well as deficient monsoon will hurt agri sector even in FY20. Monsoon deficiency of more than 5% in CY19 will hurt the sector as monsoon was 9% deficient even in CY18. Historically, deficit of 5% or more in two consecutive years impacts foodgrain production in India.