El Niño threatens rural consumption

Volatility in crude, metals and agri commodities may raise input costs, squeeze margins, weaken rural demand and increase inflationary pressure

Commodity Desk

MUMBAI

India’s consumption-driven growth story may face fresh pressure in FY27, with the looming threat of El Niño, weak rural income growth and fading tax-related benefits expected to hurt consumer spending, according to a report by Nuvama Institutional Equities. 

 The brokerage warned that slowing demand, especially in rural India, could weigh heavily on corporate earnings and delay a broader consumption recovery. 

 Nuvama said consumer demand is likely to weaken during October-March as the positive impact of the goods and services tax cut gradually fades. 

 Adding to concerns, a possible El Niño event could disrupt rainfall patterns, affect agricultural output and reduce farm incomes, directly hurting rural demand. Since rural consumption remains a key pillar of India’s economy, any prolonged weather-related disruption could spill over into broader consumption trends.

  Weak income growth is another major concern. Slower wage growth has continued to limit household spending power and capex appetite, restricting discretionary spending across sectors.  

 The brokerage noted that wage bill growth for BSE 500 companies has remained stuck in the 6-7% y/y range for a prolonged period, signalling limited improvement in income momentum. The report also highlighted India Inc.’s growing dependence on global trade, with nearly two-thirds of corporate revenue directly or indirectly linked to international markets. 

  While a relatively undervalued rupee and rising global capital expenditure in AI  could offer some support, these factors are unlikely to fully offset demand-side weakness. 

  Corporate revenue growth recovered in the second half of FY26, but geopolitical tensions are likely to pressure earnings in the first half of FY27. Although the impact may ease later, earnings growth could still fall short of expectations

  The brokerage expects net profit growth of BSE 500 companies, excluding oil marketing firms, to miss the consensus estimate of 19% growth in FY27, as earnings downgrades continue. 

  The report flagged stretched valuations in Indian equities. India’s market capitalisation-to-GDP ratio stands at 130%, significantly above the 10-year average of 100%.  

Meanwhile, the median trailing price-to-earnings ratio remains elevated at 30 times versus the long-term average of 25 times.

   Given the weak demand outlook, Nuvama expects exporters, defensive sectors and high-dividend-yield stocks to outperform, while expensive cyclical sectors may remain under pressure in the coming quarters.  Nuvama noted that industrial stocks are now trading at a premium to information technology companies despite lower free cash flow yields and moderate revenue growth of 10-12%. 

   Metal companies are also trading at richer valuations than private banks on a price-to-book basis. Even fast-moving consumer goods companies currently offer higher dividend yields than power companies despite muted growth in both sectors. 

  The brokerage said such valuation extremes were last seen during the 2007 market peak and again in September 2024, suggesting the market may be due for a valuation reset if demand remains weak. Commodity-linked sectors may also remain sensitive to global price volatility.

(With inputs from Informist)