Industrial Production-- September IIP:- Kotak Sec

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Economy
Industrial Production
September IIP: Low on account of base effects and indices. Led by minor revision
to the index calculation methodology, the IIP growth rate fell to 4.4% from an upward
revised 6.9% in August. Manufacturing production at 4.5% was the lowest since April
2009 with much of the weakness due to a strong base effect from the revised data. The
Index has been recompiled from April 2008 onwards with the new WPI series being
used for the IIP items, which are reported in value terms.




Sector-based classification shows anemic growth across the board
Based on the sectoral classification, mining and manufacturing productions were quite muted
while electricity production continued its run of weak growth in line with the past few months.
Mining production growth came in at 5.2% from August outturn of 6.6%. August outturn with
the old WPI series was at 7% (see next page for details). Coal and refinery productions from the
core sectors growth released earlier had already hinted at a muted growth in mining with growth
of (-)2% and (-)10.2%, although crude production was quite strong at 12.5% partially due to
favorable base effects. Manufacturing production was weak too with a growth rate of 4.5%
against 7.5% in August. On an m/m basis, mining contracted by 3.1% and manufacturing grew
by 1.4%. A strong base effect on manufacturing was also present as a year earlier the
manufacturing index had grown at 4.3% m/m and 14% y/y. Electricity production continued to be
weak at 1.7%, slightly higher than 1.3% as released in the core sectors growth details.
Consumer durables production weakens; capital goods production contracts
The surprise in the use-based classification was definitely consumer durables production as it
contracted by 1.8% over the month and from >20% growth for the past 15 months stood at
10.9% in September. This was due to both base effects and lower production in September.

Consumer non-durables remained flat over the month with y/y growth improving from August to
2.5%. The sector has seen a very tepid growth of around 2.1% on an FYTD basis and is likely to
pick up on the back of a good crop output. Capital goods, in an almost clichéd manner, continued
to be volatile. Production contracted by 4.2% over the year though showed a 21% growth over
last month compared to an m/m contraction of 35% in August. Production over the month also
fell for basic and intermediate goods though the y/y growth rates were in line with the trend that
the sectors have seen over for the past six months. Basic goods production stood at 3.5% and
intermediate goods at 10.3%.

Overall growth story still remains strong
Even though the recent trend may suggest a moderation in industrial production, we believe that
the growth story from the aggregate supply side will not be affected. We expect GDP growth at
8.4% primarily as we see the agriculture output being robust on the back of strong monsoons and
services sector being buoyant. From the industrial production side too, story is not gloomy. IIP excapital
goods growth is quite robust at about 6.2% which portrays the underlying momentum of
production after stripping off the volatility to certain extent. Along with this, the FYTD growth rate
is still around 10.2% and we maintain our average-FY2011E estimates at 8-9%. From November
onwards, base effects will kick in which is likely to keep the IIP growth rate at a low level.
From a policy point of view, this data release is unlikely to have any effect on RBI’s monetary policy
path. Inflation will be the focal point and given our expectation of a very gradual moderation in
inflation, we expect a 25 bps hike by end-FY2011E but rule out any policy action in the December
meeting.





The recompiled series shows significant revisions
The CSO started implementing the new WPI series in its calculations for the IIP index from
this month. As a reference it has also published the recompiled series from April 2008
onwards. The new series is used in calculation of the indices for the IIP items which are
reported in value terms. The use of the new price index has introduced significant
differences from the old series.

􀁠 On a sectoral classification, manufacturing production growth is the most ‘affected’ as
most of the revisions are on the upside. Considering the weightage of manufacturing in
the overall index, the growth rates for IIP have also undergone a significant change. On
the flip side, going by the steady consumption demand as mirrored by the strong auto
production/sales, manufacturing can turn out to be stronger than expected.