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India Quick Comment
IP Growth: Continues To
Understate Real Trend
Industrial production (IP) growth rebounds in
January 2011: IP growth picked up to 3.7%YoY in
January 2011 compared with growth of 2.5%YoY in
December (revised upwards from 1.6%YoY earlier) and
3.6%YoY in November 2010. The growth in January
was above market expectations (as per Bloomberg
survey) of 2.9%YoY. On a seasonally adjusted
sequential basis, the IP index was up 1.1% MoM (vs.
+1.9% MoM in December). On a 3MMA basis, IP growth
decelerated to an average of 3.3%YoY during the three
months ended January 2011 from 6.1% during the three
months ended December 2010.
Manufacturing growth picked up: In the
manufacturing segment, growth picked up to 3.3%YoY
(vs. 2%YoY in December). While growth in the electricity
segment accelerated to 10.5%YoY (vs. 6%YoY in
December 2010), in the mining segment it decelerated
to 1.6%YoY (vs. 5.7%YoY in December 2010).
Growth in consumer goods production up, capital
goods decline: On the use-based classification,
consumer goods growth accelerated to 11.3%YoY in
January 2011 compared to 3.7%YoY in the previous
month partly helped by the low base effect. Within
consumer goods, both durables and non-durables
segment growth accelerated to 23.3%YoY and
6.9%YoY (vs. 18.8%YoY and -1.5%YoY in December).
The capital goods segment declined further by
18.6%YoY in January partly on high base effect,
compared to -9.3%YoY in the previous month. The
slowdown was driven by weak growth in components
like shipbuilding and repair (- 55.5%), material handling
equipment in cl. wagon (- 44.7%) and insulated
cables/wires all kinds (-41.6%) respectively. Similarly,
the growth in basic and intermediate goods accelerated
to 7.6%YoY and 7.9%YoY, (vs. 6% YoY and 6.6%YoY
in December) respectively.
Official data understate the underlying growth trend: While
we are expecting a moderation in overall growth over the next
12 months, we believe that the monthly IP growth for the last
few months has been significantly underestimating underlying
growth. For instance, the broad market revenue growth for QE
Dec-10 has been reported at 19%YoY compared with 22%YoY
during the QE Sept-10. Similarly, tax revenue growth for the
QE Dec-10 was 29.4% YoY vs. 23.2% YoY during the QE
Sept-10. The tax revenue collection growth for January 2011
was also strong at 34.5%YoY, indicating economic activity is
much robust than what is represented by the IP growth data.
New IP index to improve the quality of the data series: The
government is planning to launch a new improved quality IP
index with a base year of 2004-05 (vs. 1993-94 currently). We
believe this will help improve the quality of this data series.
On macro stability risks, inflation is what concerns us
more: We expect WPI inflation to remain at or above 7% for
most of 1H11 unless global commodity prices pull back
meaningfully. We believe the Central bank may continue to
follow its gradual pace of lifting rates. We expect another 25bp
hike in the repo rate in the next mid-quarter review of monetary
policy on March 17, 2011. However, we now track bank deposit
rate as a better measure of tightening of monetary conditions
instead of the policy rates. In our view the monetary policy has
effectively tightened considerably with bank deposit rates
having moved up to close to 11-year highs if we exclude the
period worst hit by the credit crisis.
What is our view on the growth outlook?
We have again cut our GDP growth forecasts and expect a
moderation in 2011 (see our note Cutting Our Growth
Estimates Again dated March 7, 2011). We expect GDP growth
to decelerate to 7.7% in F2012 (year-end March) from 8.6%
estimated in F2011. We believe the following developments
could bring upside/downside risks to our growth forecasts:
(a) Inflation: We believe that as far as inflation is concerned,
the monetary policy has effectively tightened considerably as
discussed above. While fiscal policy remains expansionary, we
believe the government has finally moved in the right direction
targeting meaningful reductions in underlying fiscal deficit for
the first time since the credit crisis unfolded. Increasingly, we
believe that global commodity prices are key to the inflation
outlook. If global commodity prices moderate quickly with
better supply response, it will help reduce inflation pressure
faster than expected. At the same time, any major further spike
in commodity prices will make inflation management even
more difficult, hurting growth.
(b) Capex: For the overall growth outlook, in the current
environment where policy makers are unlikely to be able to
support growth with loose fiscal and monetary policy, we
believe investment growth is key. Our base case currently
assumes a gradual recovery in capex considering the macro
environment. If the government manages to implement an
aggressive "campaign-style" effort to transparently clear
investment projects with coordination from all ministries to
revive corporate capex, this would bring upside risks to our
forecasts. Similarly, if the government fails to pursue a
concerted effort to ensure a gradual recovery in capex, there
would then be further downside risks to our estimate. In this
context, apart from the general macro environment, we will be
tracking announcements from various government ministries,
anecdotal evidence on various investment projects and the
quarterly order book data of engineering and construction
companies.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Quick Comment
IP Growth: Continues To
Understate Real Trend
Industrial production (IP) growth rebounds in
January 2011: IP growth picked up to 3.7%YoY in
January 2011 compared with growth of 2.5%YoY in
December (revised upwards from 1.6%YoY earlier) and
3.6%YoY in November 2010. The growth in January
was above market expectations (as per Bloomberg
survey) of 2.9%YoY. On a seasonally adjusted
sequential basis, the IP index was up 1.1% MoM (vs.
+1.9% MoM in December). On a 3MMA basis, IP growth
decelerated to an average of 3.3%YoY during the three
months ended January 2011 from 6.1% during the three
months ended December 2010.
Manufacturing growth picked up: In the
manufacturing segment, growth picked up to 3.3%YoY
(vs. 2%YoY in December). While growth in the electricity
segment accelerated to 10.5%YoY (vs. 6%YoY in
December 2010), in the mining segment it decelerated
to 1.6%YoY (vs. 5.7%YoY in December 2010).
Growth in consumer goods production up, capital
goods decline: On the use-based classification,
consumer goods growth accelerated to 11.3%YoY in
January 2011 compared to 3.7%YoY in the previous
month partly helped by the low base effect. Within
consumer goods, both durables and non-durables
segment growth accelerated to 23.3%YoY and
6.9%YoY (vs. 18.8%YoY and -1.5%YoY in December).
The capital goods segment declined further by
18.6%YoY in January partly on high base effect,
compared to -9.3%YoY in the previous month. The
slowdown was driven by weak growth in components
like shipbuilding and repair (- 55.5%), material handling
equipment in cl. wagon (- 44.7%) and insulated
cables/wires all kinds (-41.6%) respectively. Similarly,
the growth in basic and intermediate goods accelerated
to 7.6%YoY and 7.9%YoY, (vs. 6% YoY and 6.6%YoY
in December) respectively.
Official data understate the underlying growth trend: While
we are expecting a moderation in overall growth over the next
12 months, we believe that the monthly IP growth for the last
few months has been significantly underestimating underlying
growth. For instance, the broad market revenue growth for QE
Dec-10 has been reported at 19%YoY compared with 22%YoY
during the QE Sept-10. Similarly, tax revenue growth for the
QE Dec-10 was 29.4% YoY vs. 23.2% YoY during the QE
Sept-10. The tax revenue collection growth for January 2011
was also strong at 34.5%YoY, indicating economic activity is
much robust than what is represented by the IP growth data.
New IP index to improve the quality of the data series: The
government is planning to launch a new improved quality IP
index with a base year of 2004-05 (vs. 1993-94 currently). We
believe this will help improve the quality of this data series.
On macro stability risks, inflation is what concerns us
more: We expect WPI inflation to remain at or above 7% for
most of 1H11 unless global commodity prices pull back
meaningfully. We believe the Central bank may continue to
follow its gradual pace of lifting rates. We expect another 25bp
hike in the repo rate in the next mid-quarter review of monetary
policy on March 17, 2011. However, we now track bank deposit
rate as a better measure of tightening of monetary conditions
instead of the policy rates. In our view the monetary policy has
effectively tightened considerably with bank deposit rates
having moved up to close to 11-year highs if we exclude the
period worst hit by the credit crisis.
What is our view on the growth outlook?
We have again cut our GDP growth forecasts and expect a
moderation in 2011 (see our note Cutting Our Growth
Estimates Again dated March 7, 2011). We expect GDP growth
to decelerate to 7.7% in F2012 (year-end March) from 8.6%
estimated in F2011. We believe the following developments
could bring upside/downside risks to our growth forecasts:
(a) Inflation: We believe that as far as inflation is concerned,
the monetary policy has effectively tightened considerably as
discussed above. While fiscal policy remains expansionary, we
believe the government has finally moved in the right direction
targeting meaningful reductions in underlying fiscal deficit for
the first time since the credit crisis unfolded. Increasingly, we
believe that global commodity prices are key to the inflation
outlook. If global commodity prices moderate quickly with
better supply response, it will help reduce inflation pressure
faster than expected. At the same time, any major further spike
in commodity prices will make inflation management even
more difficult, hurting growth.
(b) Capex: For the overall growth outlook, in the current
environment where policy makers are unlikely to be able to
support growth with loose fiscal and monetary policy, we
believe investment growth is key. Our base case currently
assumes a gradual recovery in capex considering the macro
environment. If the government manages to implement an
aggressive "campaign-style" effort to transparently clear
investment projects with coordination from all ministries to
revive corporate capex, this would bring upside risks to our
forecasts. Similarly, if the government fails to pursue a
concerted effort to ensure a gradual recovery in capex, there
would then be further downside risks to our estimate. In this
context, apart from the general macro environment, we will be
tracking announcements from various government ministries,
anecdotal evidence on various investment projects and the
quarterly order book data of engineering and construction
companies.
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