Below-normal monsoon won't derail rural demand, says Nomura's Mihir Shah

India's consumer sector is bracing for a weaker-than-expected monsoon this year, but Nomura's Mihir Shah, VP - Research Analyst for India Consumers, believes the impact on rural demand will be far more muted than headline fears suggest, citing healthy reservoir levels and improved irrigation infrastructure.

El Niño concerns largely priced in

Speaking to ET Now, Shah acknowledged that after two consecutive years of above-normal monsoons, India is likely heading into a below-normal monsoon year, compounded by El Niño conditions. However, he pointed out several mitigating factors that should cushion the blow. El Niño is expected to remain in a weak-to-moderate range through June, July, and August, only strengthening toward September, by which point the monsoon season is nearly over. Additionally, the Indian Ocean Dipole, currently neutral, could turn positive in the coming months, potentially offsetting El Niño's drag on rainfall.

Shah also highlighted that reservoir levels currently sit 15% above their 10-year average, while government buffer stocks are roughly double normal levels, providing a cushion against a weaker kharif harvest. He noted that India's dependence on monsoon-driven kharif output has steadily declined over the years thanks to improved irrigation and the growing importance of the rabi crop cycle, making the economy less vulnerable to rainfall shocks than a decade ago.

Rural-urban demand gap narrowing

On consumption trends, Shah noted that rural demand has moderated since the fourth quarter, while urban demand has shown early signs of pickup, narrowing the long-standing gap between the two. He expects this trend to continue, with rural demand likely to remain rangebound rather than accelerating further, particularly as staple categories face low-to-mid single-digit pricing increases alongside a weaker kharif outlook.

ITC faces sharp near-term pain

Among individual stock calls, Shah flagged ITC as a key outlier following a steep tax hike exceeding 40% at the start of the year, the first such increase in several years. With the company passing on only 25-30% of that hike through pricing, Shah expects a high single-digit volume decline and a roughly 20% EBIT decline in the cigarette business this quarter. He believes the worst will largely be behind the company after the first quarter, though on a two-year CAGR basis, earnings growth remains flat, prompting Nomura to maintain a reduced rating on the stock.

Asian Paints remains a top pick

Shah remains constructive on Asian Paints, citing a favourable base effect this year given fewer monsoon-related disruptions and the absence of election-related labour shortages that hurt last year's painting season. He expects high single-digit to early double-digit volume growth to continue, supported by pricing increases of 13-14% expected to fully reflect in the next quarter. Margin pressure, he added, should remain limited in the near term given soft commodity costs earlier in the year and existing inventory buffers.

Summer-linked categories in focus

On beverages and summer-driven categories like ice creams and cooling hair oils, Shah suggested a bottom-up approach rather than broad category bets, noting that while categories like soft drinks and ice creams should benefit from a harsh summer, others such as tea and certain QSR formats may face headwinds, creating a mixed bag of winners and losers within company portfolios.

Overall, Shah's outlook suggests cautious optimism for India's consumption space, with structural resilience in rural demand offsetting near-term monsoon-related anxieties, even as company-specific factors continue to drive differentiated performance across the sector.