Indian Stocks: Severe monsoon season is good news for Indian stocks.

Shares of Indian companies that earn a significant portion of their profits from India’s hinterland are showing signs of recovery as traders are confident that abundant monsoon rains will lead to better crop yields and increased rural demand.

Motorcycle makers, farm equipment makers and producers of fast-moving consumer goods have come together on forecasts of timely, above-normal monsoon rains in 2024 after extreme unseasonal heat has wreaked havoc on Indian agriculture over the past two years. Sales in rural areas are improving, and several major consumer goods companies have forecast stronger business going forward.

The Nifty FMCG index has risen 1.5% so far in May, outpacing the benchmark NSE Nifty 50 index by more than 2%. Each has underperformed over the past six months.

“Markets are expecting a rebound in rural demand due to a good monsoon,” said Sahil Kapoor, strategist at DSP Mutual Fund in Mumbai. If predictions of an above-average monsoon this year come true, it will help agricultural production and rural incomes, he said.

The recovery in rural stocks is also welcome news for India’s broader stock market, which has been fueled by a stellar rally in recent years by investment-focused companies that have benefited from the government’s increased infrastructure spending. Heavy rains could also help the central bank’s efforts to quell inflation by curbing rising food prices, which could improve India’s economic growth and corporate earnings outlook.Hindustan Unilever Ltd. He said demand is gradually improving across the country. Rival Dabur India Ltd. echoed the sentiment, while motorcycle maker Hero MotoCorp Ltd. said most new car inquiries are now coming from rural areas. “I think the rural economy is starting to bounce back,” Rajeev Agrawal said. He is 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% last month compared to a year earlier, according to data from the Federation of Automobile Dealers Associations. More broadly, fast-moving consumer goods companies posted 7.6% year-over-year sales growth in rural areas in the quarter ended March, according to a survey by Emkay Global Financial Services Ltd., which cited data from Nielsen. This is the first time in three years that the measure has outpaced city growth.

Certainly, there are questions about the momentum and breadth of the recovery in demand in the rural sector, given the low base for revenue comparison and the fact that some companies have benefited from volumes due to price cuts.

“This is still a hopeful trade,” said DSP Mutual Fund’s Kapoor. “We have not yet seen any meaningful recovery in profits or sales.”

Analysts at Morgan Stanley say cyclical companies are still driving growth in India, which they expect will lead to a slump in the defense sector. “We are still in the mid-stage of the essential items cycle and expect continued underperformance and declines,” they wrote in a May 9 note.

Nonetheless, growing signs that India’s investment-driven growth may be losing steam have strengthened investor interest in stocks linked to the rural sector.

The stock price of Mahindra & Mahindra Ltd., which makes agricultural equipment such as tractors, rose about 17% this month, ranking first among 16 Indian automobile manufacturers. The stock rose 6% to a record high on Friday after better-than-expected fourth-quarter results, with some analysts noting that expectations of a normal monsoon were likely to improve tractor sales.

Shares of Hero MotoCorp are up 12% so far this month.

The sharp decline in machinery imports in the January-March quarter was one of the early signs of weakening capital spending, wrote Prateek Parekh and Priyanka Shah, analysts at Nuvama Institutional Equities. The valuations of companies with large consumer goods and capex investments have converged, he said, adding that this is one of the reasons for the shift to a consumer theme.