Dalal Street

While news on the monsoon front remains bleak (rainfall during June 1-17 coming in 45% below normal), another worry is that water levels in reservoirs across the country are dwindling. Latest data monitoring the water stock in 81 key reservoirs across the country that account for 72% of India’s total reservoir stock indicate that current storage is 15 bcm – just 10% of full reservoir capacity and 20% of last year’s storage. While reservoir levels are typically lower at the onset of the monsoon, they are lower this year even in comparison to the past due to average rainfall last year and the absence of pre-monsoon showers this year.

A much further delay in the monsoons could result in states reducing the supply of water for irrigation, and conserving it for drinking purposes instead (individual states manage the water levels in their respective reservoirs). Thus while 58% of India’s net sown area is dependent on the monsoons, dwindling water reservoir levels could impact even the balance 42% of the area not dependent on the monsoons.

Insider sales hit a nine-month high in May as markets recovered and June will also be a month of high insider selling. The spike in sales betrays a likely lack of confidence in the current rally.

Stocks that have outperformed but seen large insider sales could face more downside potential if markets correct. Bharti, DLF, L&T, ITC, Kotak Bank, Shriram Transport, HDFC and HDFC Bank are among the companies that have seen relatively large insider selling in Apr-09 to Jun-09.

Insider selling in the region[Asia Pac] accelerated in May as market rally continued, hitting a record US$2.2bn (a 4x increase from April) – the highest since Sept-08. Even removing the big deals in May – the selling by promoters of DLF and Suzlon – the insider selling in May and Jun will be the highest in the last ten-months.

YTD seasonal rainfall is 45% below normal. The Met department has indicated that the weakness could continue over the next week. It is early days yet, as June typically accounts for only 20% of the total south west monsoon. But a recovery over the next month is critical, in our view.

Structurally the importance of agriculture as a percentage of GDP has decreased over the past few decades, from nearly 50% in the early 1970s to about 17% now. But the monsoon is still important for the farm sector, as nearly 60% of India’s agriculture is rainfall-dependent.

An analysis of weak monsoons over the past indicates that the earnings impact has been mixed due to various offsetting factors. But consumption-related sectors, i.e. staples,discretionary and telecom, typically underperform both over the July Sept quarter and the fiscal year in which the monsoon has been weak.

Also, in the recent past, rural India has been driving consumption growth on the back of various government stimuli. This segment is vulnerable to a pull back.