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Declining food inflation and rising cost pressures
Inflation in Feb 2011 rose to 8.3% from 8.2% in Jan 2011 despite the sharp fall in food
inflation. The rise is attributed to the sharp increase in cotton and oil seed prices. While
there is some reciprocal rise in manufactured product inflation to 4.9%, the broader
assessment indicates intensifying margin pressure and declining pass-through coefficient.
While the risk of further escalation of costs persists, we believe further monetary
tightening could hamper the growth outlook.
�� Food inflation falls to 6.5% as Dec 2010 spike proves transient: Along with the declining
trend in manufactured food inflation, overall food inflation declined sharply to 6.5% in Feb
2011 vs 10% in Dec 2010. With a broad-based fall in vegetable prices (38% MoM in Feb 2011),
the contribution of basic food items, including cereals, pulses and vegetables, declined from
over 40% in Jan 2011 to sub-20% in Feb 2011. While there has been some moderation in
prices for egg, meat and fish, milk prices have continued to rise resulting in slower decline in
primary food inflation.
�� India tackling surplus and not deficient food condition: While there is a consensus that
the recent pick-up in food inflation has been in response to supply shortages and the rise in
demand, recent developments indicate over-supply conditions. This is reflected in the recent
decision to lift the ban on rice and onion exports. There has been some increase in wheat
prices in recent months. But the likelihood of higher production of over 82mt in the current
season and the continued excess buffer stock is prompting government to think about
allowing wheat exports. Overall, food grain production in 2010-11 seasons is expected to be
over 232mt and is likely to keep supply more than adequate. Attempts to stabilize domestic
prices by allowing exports clearly imply than India is tackling surplus and not deficient food
conditions.
�� Increase in raw material cost: For the month of Feb 2011, the non-food primary articles
rose by 4.1% MoM on the back of a steep 20% rise in raw cotton. Index for oil seeds also
spiked up 5.3% in response to a broad-based rise in prices for several produce: Copra
(coconut) 12.7%, castor seed 29.7%, safflower (kardi seed) 4.2%, sunflower 11.5% and
soyabean11.2%. Raw rubber index has been rising consistently over since Sep 2010, rising
nearly 40%. Broadly, over the 12 months, the increase in raw material cost has come from
items such as raw cotton (caused by global short supply of raw cotton), rubber (arising from
strong domestic production of automotives), minerals (iron ores) and few other items.
�� Declining pass-through of rising material cost hurting margins: Recent data indicates
that rising material costs are hurting margins for the manufacturing sector. While
manufactured product inflation increased to 4.9% YoY in Feb 2011 (vs 3.8% a month back), it
has been a partial lagged response to the steep rise costs. The increase in the cost of raw
materials at 11.5% and 25% respectively for fuels and primary ex-food is much sharper than
the rise in inflation for manufactured products. The pass through coefficient has been
declining since mid-2010 and has turned negative in 2011.
�� Only few sectors have demonstrated rise in pricing power: Overall, except for edible oils,
we see slower and proportionally lower response of product prices to rise in input cost. This
is particularly evident in the case of automotives and cotton textiles. Declining pass-through
for the automobile industries is surprising given the robust volume growth and possibly
reflects competitive pressure. While metal product prices have risen in the recent months
(1.7% MoM and 8.6% YoY in Feb 2011), they have been far slower than the rise in index for
metallic minerals. The partial 19% rise in textile prices in response to 80% spike up in cotton
prices is symptomatic of severe margin pressure. In addition, the ready-made garment
industry is also getting adversely impacted by the imposition of 10% excise duty announced
by the union budget FY12.
�� Aggressive monetary tightening will hamper growth: In our view, given the cost
pressures and declining manufacturing sector growth further monetary policy tightening
could adversely impact growth outlook. Curtailment of real fiscal spending as per the budget
2011-12 indicates anti-inflationary attempts from the fiscal policies, thereby reducing the
burden for the monetary policy. While the rise in crude and global commodity prices
continue to pose severe risk to domestic inflation, we believe beyond maintaining the
current level of monetary tightening, the RBI can do little to control it. Inclusive of past rate
actions, CRR hikes and curtailment of money supply growth, we believe the RBI has executed
sufficient tightening already and further aggressive tightening could hamper growth.
Food inflation falls to 6.5% as Dec 2010 spike proves transient
As expected the spike in food inflation in Dec 2010 and Jan 2011 proved transient given the steep
fall in prices of vegetables. Along with the declining trend in manufactured food inflation the
overall food inflation declined sharply to 6.5% in Feb 2011 from about 10% in Dec 2010. With a
broad-based fall in vegetable prices, the contribution of basic food items including cereals, pulses
and vegetables declined from over 40% in Jan 2011 to the sub-20% levels in Feb 2011. While there
has been some moderation in prices for egg, meat and fish, milk prices have continued to rise
resulting in slower decline in primary food inflation.
While there is a consensus view that the recent pick-up in food inflation has been in response to
supply shortages and rise in demand, evidence considered to support rising prosperity argument,
recent developments indicate over supply conditions. This is reflected in the fact that government
has recently lifted the ban on rice and onion exports. In addition, the minimum export price for
onion has been slashed by nearly 50% over the past month.
While there has been some increase in wheat prices in the recent months the wholesale price
continues to be low at Rs1,200/quintal. The likelihood of higher production of over 82mt in the
current season will likely imply downside pressure during the harvest season which starts from
March. Currently the buffer for both wheat and rice at 17.2mt and 28.8mt, respectively, is more
than twice the minimum norm. Currently, the government is pondering over the possibility of
allowing wheat exports. So quite clearly, exports have seen as an option for stabilizing domestic
prices and it is more than evident that India is tackling surplus food grain and not deficit
conditions.
We also highlight that the high vegetable price inflation in Jan 2011 may be a statistical aberration
as mandi prices from various states available from Indian Horticulture Bureau indicated a fall in
prices rather than a rise as per WPI. On comparison we found significant deviation between the
WPI and mandi level data.
Declining pass-through of rising material cost hurting margins
Recent data corroborates our assessment that rising material costs are hurting margins for the
manufacturing sector. While manufactured product inflation increased to 4.9% in Feb 2010 from
3.8% a month back, it has been a partial lagged response to the steep rise costs. The increase in the
cost of raw materials at 11.5% and 25%, respectively, for fuels and primary ex-food is much sharper
than the rise in inflation for manufactured products. It is clearly visible from Exhibit 10 that pass
through coefficient has been declining since mid-2010 and has turned negative in 2011.
For the month of Feb 2011, the non-food primary articles rose by 4.1% MoM on the back of steep
20% rise in raw cotton. Index for oil seeds also spiked up to 5.3% in response to a broad-based rise in
prices for several produce: Copra (Coconut) 12.7%, Castor seed 29.7%, Safflower (kardi seed) 4.2%,
Sunflower 11.5% and Soyabean11.2%. Raw rubber index has been rising consistently over since Sep
2010, rising nearly 40%. Broadly, over the 12 months increase in raw material cost has come from
items such as raw cotton (caused by global short supply of raw cotton), rubber (arising from strong
domestic production of automotives), minerals (iron ores) and few other items.
We look at the disaggregated data for some industries to see the manufactured price response to the
rise in respective raw material costs. Overall, except for edible oil we see slowed and proportionally
lower response of product prices to rise in input cost. This is particularly evident in the case of
automotives and cotton textiles. Declining pass-through for the automobile industries is surprising
given the robust volume growth and possibly reflects competitive pressure. While metal product
prices have risen in the recent months (1.7% MoM and 8.6% YoY in Feb 2011), it has been far slower
than the rise in index for metallic minerals.
Charts below show impact of manufactured product price to the relevant input cost prices (derived
from WPI YoY inflation for various indicators). Exhibits 11 & 12 summarize the key input cost
components. They show that while input costs have been rising since mid 2009, the pressure seem
to have accelerated in 2010. Notwithstanding some moderations in the recent months cotton
prices and fuel components have continued to rise sharply.
Product level inflation show:
Little response of rising rubber and flat steel prices on automotive inflation indicating pricing
pressures despite robust volume growth for the sector. We also notice that intermediate
product prices such as rubber tubes, piston compressors have also risen sharply. However,
other auto ancillary components have seen very modest inflation.
Inflation for cotton textiles have risen to 19% YoY and 4.9% MoM in Feb 2011 it has been
significantly smaller than the 80% YoY and 19.6% MoM rise in price of raw cotton. Cotton
textiles prices have mostly remained stagnant (1.1% average annual inflation) for 2005-2009
and the recent rise in response to spike up in cotton and yarn prices is symptomatic of severe
margin pressure. In addition, the ready made garment industry is also getting adversely
impacted by the imposition of 10% excise duty announced by the union budget FY12.
Basic metal inflation ex gold and silver of 6.9% YoY in Feb 2011 has significantly lagged the
earlier escalation in inflation of metallic minerals, which averaged at 53% since Jul 2010. While
a large part of spike up in metallic mineral index happened in Jan 2010 (30% MoM) the lag in
response in final product prices have been both lesser and slower.
Possibly the strongest pricing power seem to be evident in the case of edible oil. The build up
in edible oil index of 12% (Mar 2010-Feb 2011) is higher than 10% for oil seeds.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Declining food inflation and rising cost pressures
Inflation in Feb 2011 rose to 8.3% from 8.2% in Jan 2011 despite the sharp fall in food
inflation. The rise is attributed to the sharp increase in cotton and oil seed prices. While
there is some reciprocal rise in manufactured product inflation to 4.9%, the broader
assessment indicates intensifying margin pressure and declining pass-through coefficient.
While the risk of further escalation of costs persists, we believe further monetary
tightening could hamper the growth outlook.
�� Food inflation falls to 6.5% as Dec 2010 spike proves transient: Along with the declining
trend in manufactured food inflation, overall food inflation declined sharply to 6.5% in Feb
2011 vs 10% in Dec 2010. With a broad-based fall in vegetable prices (38% MoM in Feb 2011),
the contribution of basic food items, including cereals, pulses and vegetables, declined from
over 40% in Jan 2011 to sub-20% in Feb 2011. While there has been some moderation in
prices for egg, meat and fish, milk prices have continued to rise resulting in slower decline in
primary food inflation.
�� India tackling surplus and not deficient food condition: While there is a consensus that
the recent pick-up in food inflation has been in response to supply shortages and the rise in
demand, recent developments indicate over-supply conditions. This is reflected in the recent
decision to lift the ban on rice and onion exports. There has been some increase in wheat
prices in recent months. But the likelihood of higher production of over 82mt in the current
season and the continued excess buffer stock is prompting government to think about
allowing wheat exports. Overall, food grain production in 2010-11 seasons is expected to be
over 232mt and is likely to keep supply more than adequate. Attempts to stabilize domestic
prices by allowing exports clearly imply than India is tackling surplus and not deficient food
conditions.
�� Increase in raw material cost: For the month of Feb 2011, the non-food primary articles
rose by 4.1% MoM on the back of a steep 20% rise in raw cotton. Index for oil seeds also
spiked up 5.3% in response to a broad-based rise in prices for several produce: Copra
(coconut) 12.7%, castor seed 29.7%, safflower (kardi seed) 4.2%, sunflower 11.5% and
soyabean11.2%. Raw rubber index has been rising consistently over since Sep 2010, rising
nearly 40%. Broadly, over the 12 months, the increase in raw material cost has come from
items such as raw cotton (caused by global short supply of raw cotton), rubber (arising from
strong domestic production of automotives), minerals (iron ores) and few other items.
�� Declining pass-through of rising material cost hurting margins: Recent data indicates
that rising material costs are hurting margins for the manufacturing sector. While
manufactured product inflation increased to 4.9% YoY in Feb 2011 (vs 3.8% a month back), it
has been a partial lagged response to the steep rise costs. The increase in the cost of raw
materials at 11.5% and 25% respectively for fuels and primary ex-food is much sharper than
the rise in inflation for manufactured products. The pass through coefficient has been
declining since mid-2010 and has turned negative in 2011.
�� Only few sectors have demonstrated rise in pricing power: Overall, except for edible oils,
we see slower and proportionally lower response of product prices to rise in input cost. This
is particularly evident in the case of automotives and cotton textiles. Declining pass-through
for the automobile industries is surprising given the robust volume growth and possibly
reflects competitive pressure. While metal product prices have risen in the recent months
(1.7% MoM and 8.6% YoY in Feb 2011), they have been far slower than the rise in index for
metallic minerals. The partial 19% rise in textile prices in response to 80% spike up in cotton
prices is symptomatic of severe margin pressure. In addition, the ready-made garment
industry is also getting adversely impacted by the imposition of 10% excise duty announced
by the union budget FY12.
�� Aggressive monetary tightening will hamper growth: In our view, given the cost
pressures and declining manufacturing sector growth further monetary policy tightening
could adversely impact growth outlook. Curtailment of real fiscal spending as per the budget
2011-12 indicates anti-inflationary attempts from the fiscal policies, thereby reducing the
burden for the monetary policy. While the rise in crude and global commodity prices
continue to pose severe risk to domestic inflation, we believe beyond maintaining the
current level of monetary tightening, the RBI can do little to control it. Inclusive of past rate
actions, CRR hikes and curtailment of money supply growth, we believe the RBI has executed
sufficient tightening already and further aggressive tightening could hamper growth.
Food inflation falls to 6.5% as Dec 2010 spike proves transient
As expected the spike in food inflation in Dec 2010 and Jan 2011 proved transient given the steep
fall in prices of vegetables. Along with the declining trend in manufactured food inflation the
overall food inflation declined sharply to 6.5% in Feb 2011 from about 10% in Dec 2010. With a
broad-based fall in vegetable prices, the contribution of basic food items including cereals, pulses
and vegetables declined from over 40% in Jan 2011 to the sub-20% levels in Feb 2011. While there
has been some moderation in prices for egg, meat and fish, milk prices have continued to rise
resulting in slower decline in primary food inflation.
While there is a consensus view that the recent pick-up in food inflation has been in response to
supply shortages and rise in demand, evidence considered to support rising prosperity argument,
recent developments indicate over supply conditions. This is reflected in the fact that government
has recently lifted the ban on rice and onion exports. In addition, the minimum export price for
onion has been slashed by nearly 50% over the past month.
While there has been some increase in wheat prices in the recent months the wholesale price
continues to be low at Rs1,200/quintal. The likelihood of higher production of over 82mt in the
current season will likely imply downside pressure during the harvest season which starts from
March. Currently the buffer for both wheat and rice at 17.2mt and 28.8mt, respectively, is more
than twice the minimum norm. Currently, the government is pondering over the possibility of
allowing wheat exports. So quite clearly, exports have seen as an option for stabilizing domestic
prices and it is more than evident that India is tackling surplus food grain and not deficit
conditions.
We also highlight that the high vegetable price inflation in Jan 2011 may be a statistical aberration
as mandi prices from various states available from Indian Horticulture Bureau indicated a fall in
prices rather than a rise as per WPI. On comparison we found significant deviation between the
WPI and mandi level data.
Declining pass-through of rising material cost hurting margins
Recent data corroborates our assessment that rising material costs are hurting margins for the
manufacturing sector. While manufactured product inflation increased to 4.9% in Feb 2010 from
3.8% a month back, it has been a partial lagged response to the steep rise costs. The increase in the
cost of raw materials at 11.5% and 25%, respectively, for fuels and primary ex-food is much sharper
than the rise in inflation for manufactured products. It is clearly visible from Exhibit 10 that pass
through coefficient has been declining since mid-2010 and has turned negative in 2011.
For the month of Feb 2011, the non-food primary articles rose by 4.1% MoM on the back of steep
20% rise in raw cotton. Index for oil seeds also spiked up to 5.3% in response to a broad-based rise in
prices for several produce: Copra (Coconut) 12.7%, Castor seed 29.7%, Safflower (kardi seed) 4.2%,
Sunflower 11.5% and Soyabean11.2%. Raw rubber index has been rising consistently over since Sep
2010, rising nearly 40%. Broadly, over the 12 months increase in raw material cost has come from
items such as raw cotton (caused by global short supply of raw cotton), rubber (arising from strong
domestic production of automotives), minerals (iron ores) and few other items.
We look at the disaggregated data for some industries to see the manufactured price response to the
rise in respective raw material costs. Overall, except for edible oil we see slowed and proportionally
lower response of product prices to rise in input cost. This is particularly evident in the case of
automotives and cotton textiles. Declining pass-through for the automobile industries is surprising
given the robust volume growth and possibly reflects competitive pressure. While metal product
prices have risen in the recent months (1.7% MoM and 8.6% YoY in Feb 2011), it has been far slower
than the rise in index for metallic minerals.
Charts below show impact of manufactured product price to the relevant input cost prices (derived
from WPI YoY inflation for various indicators). Exhibits 11 & 12 summarize the key input cost
components. They show that while input costs have been rising since mid 2009, the pressure seem
to have accelerated in 2010. Notwithstanding some moderations in the recent months cotton
prices and fuel components have continued to rise sharply.
Product level inflation show:
Little response of rising rubber and flat steel prices on automotive inflation indicating pricing
pressures despite robust volume growth for the sector. We also notice that intermediate
product prices such as rubber tubes, piston compressors have also risen sharply. However,
other auto ancillary components have seen very modest inflation.
Inflation for cotton textiles have risen to 19% YoY and 4.9% MoM in Feb 2011 it has been
significantly smaller than the 80% YoY and 19.6% MoM rise in price of raw cotton. Cotton
textiles prices have mostly remained stagnant (1.1% average annual inflation) for 2005-2009
and the recent rise in response to spike up in cotton and yarn prices is symptomatic of severe
margin pressure. In addition, the ready made garment industry is also getting adversely
impacted by the imposition of 10% excise duty announced by the union budget FY12.
Basic metal inflation ex gold and silver of 6.9% YoY in Feb 2011 has significantly lagged the
earlier escalation in inflation of metallic minerals, which averaged at 53% since Jul 2010. While
a large part of spike up in metallic mineral index happened in Jan 2010 (30% MoM) the lag in
response in final product prices have been both lesser and slower.
Possibly the strongest pricing power seem to be evident in the case of edible oil. The build up
in edible oil index of 12% (Mar 2010-Feb 2011) is higher than 10% for oil seeds.
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