– By Manish Jain
The US-based National Oceanic and Atmospheric Administration has predicted that 2023 shall be a year of El Nino. The probability has been set at a fairly high level – 55-60% and it’s expected to set in between June-December 2023. For the uninitiated, El Nino is a part of global climate change and is associated with warmer climates and deficient rainfall, thus having a strong impact on the agriculture segment and consequently on the Indian Economy. This has raised a little bit of a concern in the equity markets about the recovery in rural demand and thus consequently is being viewed as a key risk to FY24 Nifty earnings.
Now to fully understand the context, two things need to be kept in mind: a) that the government has already announced a massive cut in the revenue expenditure for FY23-24 in the recently announced budget. Both NERGA allocation and Fertilizer subsidy estimates are down massively on a Y-Y basis, and b) the Rabi sowing data is not very confidence inspiring. The final numbers show a miniscule 3% y-y increase in sowing for the season largely backed by strong performance by Rice (ex of which is a decline).
So, when viewed in totality, the question that begs to be answered is: Is the rural demand recovery story over for the foreseeable future? The even bigger question is – Is there a risk to 15% earnings growth estimates for Nifty for FY24E?
The long answer short for these questions is an emphatic – No! There are few key points that merit a detailed discussion because averages hide more than they reveal.
- Agri contribution to rural income is often overestimated: People often believe that agriculture accounts for a lion’s share of the rural income which is a misconception. The actual number stands at 35-37%. Over the years, the private sector, daily wage earners, self-employed and infrastructure have ramped up quite well. This should soften the blow.
- Real rural wages: WPI inflation has corrected to below 5% levels which means that real rural wages are now in the positive. The squeeze on disposable incomes has stopped and this should be a major relief and hold the demand up.
- Impact of rainfall on output – The data here is quite inconclusive. In the recent history of 8-9 years, El Nino has played out twice during which rainfall has been below normal and once above. Once output declined by 5% once was marginally up. So, just because El Nino is coming, there is no guarantee that the rural economy is in trouble.
Overall, the positives outweigh the concerns by a wide margin. We believe that equity markets are now starting to settle down and hence it’s the right time to invest, however whenever investing, remember to always keep quality in mind. Buy the good & clean businesses. Happy investing!
(Manish Jain, Fund Manager, Coffee Can PMS, Ambit Asset Management. Views expressed are author’s own. Please consult your financial advisor before investing.)