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Economy
Industrial Production
December IIP: Pulled down by base effects. Industrial growth decelerated to a 20-
month low of 1.6% in December, lower than consensus expectations of 2% but higher
than our own number of (-)0.7%. November reading was revised up to 3.6% (earlier
2.7%). On the use-based side, relatively strong growth was observed in consumer
durables while capital goods remained volatile. With a strong negative base effect
playing into this month’s number, the headline print masks the 10.3% mom jump in
the index, a reminder of the continued momentum in industrial growth.
Manufacturing growth yet to become broad-based
Manufacturing sector growth slumped to 1%, but the steep moderation is entirely a result of an
unfavorable base effect, as the index rose by close to 11% mom. In fact, FYTD average
manufacturing growth is still robust at 9.1% as against 8.9% last year. However, a closer look at
the break-up of the sector shows that manufacturing growth is entirely being driven by a few
industrial segments, such as ‘machinery and equipment ex transport equipment’, ‘transport
equipment and parts’, and ‘metal products and parts ex machinery and equipment’. The strong
performance of these industrial sectors is reflected in the continued strength of passenger car sales
and CV vehicle sales data. The top-5 industries (in terms of YTD growth) with a share of 35.3% in
manufacturing, are contributing nearly 70% to overall manufacturing sector growth. Moreover, of
the 17 sub-sectors of manufacturing, only 9 (weight of 40.1% in manufacturing sector and 31.8%
in IIP), are seeing FYTD growths higher than the corresponding period last year. At the other end,
5 industries (weight of 30% in manufacturing) are seeing negative or feeble growth. The strong
base effect was also present in the mining sector that grew at 3.8% in December from 11.1% in
December 2009 and 7.4% in November 2010. However, electricity sector growth accelerated to
6.0%, stronger than the 4.3% reported in the core sector industrial production release.
Consumer durables continue to march forward, while non-durables and capital goods contract
In December, capital goods and consumer non-durables contracted by 13.7% and 1.1%,
respectively, even as the respective indices rose by 10.5% and 19.0% on a mom basis, owing to
the adverse base effect at play. Within the capital goods sector, items such as ‘computer systems
and its peripherals’, ‘agricultural implements’, ‘shipbuilding and repair’, ‘insulated cables/wires’,
with a combined weight of 13.9% in capital goods sector, declined by more than 40% yoy.
Similarly, ‘cigarettes’, ‘hair oil’ and ‘rice barn oil’ within the consumer non-durables sector fell
sharply. However, following the post-Diwali slump, consumer durable goods rebounded, growing
by 18.5%. Production of passenger cars and motor cycles that contracted on a mom basis in
November has increased in December (accounts for about 15% of consumer durables). Basic
goods growth moderated to 5.2% while intermediate goods growth picked up to 6.6%.
Moderating trend in industrial production to continue
Industrial production has clearly been on a softening path, with growth slowing from a high of
12% in 1QFY11 to 9.1% in 2QFY11 and further to 5.5% in 3QFY11. Further, with 4QFY10
growth averaging at 15.8%, there are chances that the strong base of the last year could lead to
the IIP to average at around 2.5-3.0% in 4QFY11E. Despite this, we see GDP growth for FY2011E
to be robust at 8.6%, on the back of a strong service sector and recovery in agriculture. From a
policy perspective, inflation management would continue to be the key objective. However, with
the predominantly supply-side nature of inflation and with growth moderating cyclically, RBI is
unlikely to be very aggressive in adjusting policy rates higher. We expect RBI to raise policy rates by
an added 75-100 bps through FY2012E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Economy
Industrial Production
December IIP: Pulled down by base effects. Industrial growth decelerated to a 20-
month low of 1.6% in December, lower than consensus expectations of 2% but higher
than our own number of (-)0.7%. November reading was revised up to 3.6% (earlier
2.7%). On the use-based side, relatively strong growth was observed in consumer
durables while capital goods remained volatile. With a strong negative base effect
playing into this month’s number, the headline print masks the 10.3% mom jump in
the index, a reminder of the continued momentum in industrial growth.
Manufacturing growth yet to become broad-based
Manufacturing sector growth slumped to 1%, but the steep moderation is entirely a result of an
unfavorable base effect, as the index rose by close to 11% mom. In fact, FYTD average
manufacturing growth is still robust at 9.1% as against 8.9% last year. However, a closer look at
the break-up of the sector shows that manufacturing growth is entirely being driven by a few
industrial segments, such as ‘machinery and equipment ex transport equipment’, ‘transport
equipment and parts’, and ‘metal products and parts ex machinery and equipment’. The strong
performance of these industrial sectors is reflected in the continued strength of passenger car sales
and CV vehicle sales data. The top-5 industries (in terms of YTD growth) with a share of 35.3% in
manufacturing, are contributing nearly 70% to overall manufacturing sector growth. Moreover, of
the 17 sub-sectors of manufacturing, only 9 (weight of 40.1% in manufacturing sector and 31.8%
in IIP), are seeing FYTD growths higher than the corresponding period last year. At the other end,
5 industries (weight of 30% in manufacturing) are seeing negative or feeble growth. The strong
base effect was also present in the mining sector that grew at 3.8% in December from 11.1% in
December 2009 and 7.4% in November 2010. However, electricity sector growth accelerated to
6.0%, stronger than the 4.3% reported in the core sector industrial production release.
Consumer durables continue to march forward, while non-durables and capital goods contract
In December, capital goods and consumer non-durables contracted by 13.7% and 1.1%,
respectively, even as the respective indices rose by 10.5% and 19.0% on a mom basis, owing to
the adverse base effect at play. Within the capital goods sector, items such as ‘computer systems
and its peripherals’, ‘agricultural implements’, ‘shipbuilding and repair’, ‘insulated cables/wires’,
with a combined weight of 13.9% in capital goods sector, declined by more than 40% yoy.
Similarly, ‘cigarettes’, ‘hair oil’ and ‘rice barn oil’ within the consumer non-durables sector fell
sharply. However, following the post-Diwali slump, consumer durable goods rebounded, growing
by 18.5%. Production of passenger cars and motor cycles that contracted on a mom basis in
November has increased in December (accounts for about 15% of consumer durables). Basic
goods growth moderated to 5.2% while intermediate goods growth picked up to 6.6%.
Moderating trend in industrial production to continue
Industrial production has clearly been on a softening path, with growth slowing from a high of
12% in 1QFY11 to 9.1% in 2QFY11 and further to 5.5% in 3QFY11. Further, with 4QFY10
growth averaging at 15.8%, there are chances that the strong base of the last year could lead to
the IIP to average at around 2.5-3.0% in 4QFY11E. Despite this, we see GDP growth for FY2011E
to be robust at 8.6%, on the back of a strong service sector and recovery in agriculture. From a
policy perspective, inflation management would continue to be the key objective. However, with
the predominantly supply-side nature of inflation and with growth moderating cyclically, RBI is
unlikely to be very aggressive in adjusting policy rates higher. We expect RBI to raise policy rates by
an added 75-100 bps through FY2012E.
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