Dabur India, PI Industries could rally 19-26% return on above normal monsoon: Siddhartha Khemka

It expects rainfall in the upcoming monsoon to be at an eight-year high of 106% (with an error margin of +/-5%) of the long-period average of 870mm for the four-month period from June 2024 to September 2024.

Geographically, monsoon rainfall is likely to be below normal in the northeast region, normal in northwest, and above normal in the central and southern peninsular regions of the country.

The monsoon ‘core zone,’ which encompasses most of central India and is critical for the kharif crop (rain-fed agriculture areas), is likely to receive above-normal rainfall (more than 106% of LPA).

Madhya Pradesh, Rajasthan, Maharashtra, Odisha, Chhattisgarh, Uttar Pradesh and West Bengal form the country’s core monsoon zone.However, deteriorating reservoir levels are a cause for concern. According to the Central Water Commission, water storage in 150 major reservoirs in India dropped to just 24% of their live storage last week, exacerbating water shortages in many states.With crippling heat testing power grids and triggering drought-like conditions in parts of the country, a prediction of above-normal monsoonal rainfall comes as a huge relief for the nation.The IMD stated, “El Nino is likely to weaken to a neutral stage during the early part of the monsoon season and La Nina conditions are likely to develop during the second half of the monsoon season (August-September 2024).”

El Nino is associated with suppressed rainfall during the Indian monsoon, while La Nina is known to help rainfall activity.

The IMD mentioned that in the 22 years since 1951 when La Nina conditions prevailed, monsoon rainfall was normal or above normal for 20 years — it was below normal in 1974 and 2000. There were nine years when La Nina conditions were preceded by El Nino conditions.

The prediction of La Nina (above normal monsoon) in FY25 offers hope for the revival in the agricultural income and consequently the rural economy, following the onset of El Nino in FY24. Historically, La Niña has bolstered India’s Kharif and Rabi production through enhanced rainfall and rising reservoir levels, leading to notable increases in production.

Consequently, leading to better farm profitability.

Improved monsoon forecasts typically drive higher revenue and increased volumes in the agrochemical and fertilizer business.

La Niña events historically correlate with better revenue growth during those years. Also, consumer companies with higher rural salience witnessed a healthy growth during this period.

Dabur India: Buy | Target Rs 650 | LTP Rs 546 | Upside 19%

The company is optimistic of a gradual uptick in consumption trends in FY25, considering normal monsoons, improving macros, continued government spending, and lower inflation. Dabur has consistently witnessed a higher rural growth compared to urban regions.

With improving volume trajectory and no price-cut impact on revenue (unlike peers), we expect revenue growth outperformance to sustain in the near term.

The operating margin also has a scope for improvement in the medium term, hovering around the ~20% band, over the last eight to nine years (unlike peers that enjoyed expansion).

PI Industries: Buy | LTP Rs 3,551 | Target Rs 4,490 | Upside 26%

PI has levers in place to sustain near-term growth, led by i) consistent growth momentum in the CSM business, driven by a strong order book, the rising pace of commercialization of new molecules, and a sale ramp -up in existing molecules, ii) product launches in the domestic market (seven new launches in FY24); and iii) the recent acquisition in the pharma API and CDMO segments, which is expected to be one of the key growth pillars for the company in the future.

PI will be creating a differentiated position in the pharma sector by leveraging its core competencies. Management expects revenue growth of 15% in FY25.

(The author is Head – Retail Research, Motilal Oswal Financial Services)

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