Monsoon grip on India's economy weakens

Via Reuters

The early arrival of India's annual monsoon promises good crops and incomes for millions of farmers but economists say the rains no longer hold such a sway over Asia's third-largest economy as they used to in the past.

The June-September rains are often defined as India's economic lifeline. The progress of the monsoon is keenly watched, for it used to hold the key to everything from crop output to inflation, consumer spending and economic growth.

But things are changing.

For years, India was largely a closed economy with agriculture and rural consumption the main drivers of supply and demand. A few decades ago, a bad monsoon could push the economy into recession.

Agriculture is still a large part of the economy and with two-thirds of India's population of more than one billion living off farming-related activities, rural incomes are a major source of demand for everything from soaps to compact cars.

Yet farming's contribution to economic growth is dwindling.

The sector's share of the trillion dollar economy has fallen steadily to about 22 percent from 38 percent in 1980 -- a trend that appears to be accelerating.

"The broader impact of a poor monsoon on growth is definitely coming off," said Rajeev Malik, Singapore-based economist with JP Morgan Chase.

"In case of a severe drought it will take a toll, but not as bad as it used to be as in the past," he said.

India's performance in the 2006/2007 fiscal year is a case in point.

The economy grew by a hefty 9.4 percent, propelled by double-digit expansion in manufacturing and services, even as the farm sector grew by a paltry 2.7 percent.

For the current financial year ending in March 2008 the central bank predicts growth of 8.5 percent.

SHRINKING FARMING

As India embraced free market reforms in 1991, the farm sector was eclipsed by services and manufacturing as production controls and tariff barriers were removed to open the economy to global supply and demand.

With vital industries such as software and pharmaceuticals powering India's growth now, investors don't have to worry as much as before whether a bad monsoon will hit village demand for motorcycles, shampoo or refrigerators.

"There is increasing de-linking happening between industry and farm sector," said Shubhada Rao, chief economist with Yes Bank.

Rao said companies have started moving their manufacturing away from overcrowded cities, creating new opportunities for the rural population.

The contrast between manufacturing and farm performance was particularly telling in 2004 when farm output stagnated because of erratic monsoon rains but manufacturing expanded almost 9 percent.

It was possible because many villagers who saw their farm incomes hit by bad weather found work on a massive government highway scheme, which allowed them to maintain normal levels of earnings and spending.

But for all its diminishing impact, the rural economy is still on investors' and economists' radar screens as poor rains can hit farmers' profits and hurt other sectors, analysts say.

With the majority of Indians still living in the countryside ups and downs in rural incomes still have a sizeable impact on consumption and growth, they say.

In fact, saturated urban markets mean that makers of consumer goods such as Hindustan Lever Ltd. increasingly rely on rural demand to boost their sales.

"The influence of farm sector on the economy has come down but rural demand still holds the key to overall growth and that is unlikely to change," said N.R. Bhanumurthy, economist the Institute of Economic Growth.

Citigroup - Biocon, India Economics - Monetary Policy, Monsoons, Asia Macro View - Rupee

Citigroup - India Economics - Monsoons

Citigroup - India Economics - Monetary Policy

Citigroup - Asia Macro - Rupee View

Citigroup - Biocon

Sharekhan Investor's Eye dated March 29, 2007

Gateway Distriparks
Cluster: Cannonball
Recommendation: Buy
Price target: Rs250
Current market price: Rs160

Gateway forms a 51:49 JV with Concor

Key points

• Gateway Distriparks Ltd (GDL) through its subsidiary Gateway Rail has formed a 51:49 joint venture with Container Corporation of India (Concor) to construct and operate a rail-linked double-stack container terminal at Garhi-Harsaru, 7 kilometre from Gurgaon in Haryana.
• The rail-linked inland container depot (ICD) currently operated by GDL will be transferred to the joint venture. The excess land (approximately 70 acre) owned by GDL will also be transferred to the joint venture and GDL will earn lease rentals on the same.
• The total cost of setting up the joint venture will be Rs70 crore which will be funded in the debt/equity ratio of 2:1.
• The revenues (handling charges and ground rent) arising from the joint venture will be shared in the ratio of the stakes held by the two companies.
• The profits from the rail operations for the movement of container rakes from the Garhi ICD to the ports will be equally shared between GDL and Concor.
• We maintain our bullish stance on the company as it will be the direct beneficiary of the growth in container traffic, which currently accounts for just 10% of the total cargo.
• The stock has significantly underperformed the Sensex in the last three months, declining by 21% over the period. So we believe this to be a good buying opportunity for the investors and thus maintain our Buy recommendation with a price target of Rs250.

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VIEWPOINT

Glenmark Pharmaceuticals

An all-round growth
The recent developments on Glenmark are indicative of the management’s aggressiveness in growing the company. The management has been undertaking an all-round effort to grow in all the different segments of the business, whether it is expanding its product basket in the USA and Latin America, entering new markets like Europe or creation and unlocking value from assets created out of its research and development (R&D) assets. Through selection of niche, difficult to manufacture products with limited competition for the US market, Glenmark has been able to capitalise on each of its products and grow its US business by leaps and bounds. The recent disclosure of its Para IV ANDA filing for generic Ezetimibe (for which it is the only ANDA filer till date) is reflective of the strong product selection strategy of the company. Further, Glenmark has positioned itself as a truly innovative, research-driven company by the successful creation and unlocking of value of its IP assets.

Glenmark is upbeat about its growth prospects for the next two years, with its US and Latin American business being the major growth engines. As per the company's projections, it is planning to grow at a CAGR of 52% over FY2006-08E to $379 million, with the profits growing at a CAGR of over 137% over the same period to $115 million. The company has given earnings per share (EPS) guidance of Rs23.6 per share in FY2007E and Rs43.8 per share in FY2008E. The projected EPS however includes the anticipated milestone payments of $31 million in FY2007 and $69 million in FY2008. On excluding the impact of the uncertain milestone payments, the EPS would reduce by 50%.

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MONSOON WATCH

Indian monsoon outlook gets a fillip

In our Special Market Outlook issue “Setting sights on 16000” dated January 02, 2007, we had mentioned about certain risks among which El Nino and its impact on the Indian monsoon were important ones. We had also mentioned that we needed to follow the development of the El Nino pattern. In this write-up we have revisited the latest developments surrounding the El Nino weather pattern

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