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Economy
Industrial Production
February IIP: Capital goods plays spoilsport, once again. Industrial production in
February rose by 3.6%, lower than consensus expectations of 5.2% and our
expectation of 4.5%. The volatile capital goods sector once again pulled down overall
IIP as it showed de-growth for the third consecutive month (at (-)18.4%). Consumer
durables sector, on the other hand, remained resilient, growing by 23.4%.
Manufacturing sector growth was steady at 3.5%.
'Industrial production growth remains subdued
Manufacturing sector growth has slowed down sharply from double digits in 1HFY11 to low single
digits in 2HFY11 (especially since November 2011). The sector grew at 3.5% in February from an
upward revised 3.6% in January. The lackluster growth in the manufacturing sector, to some
extent, was expected as February of any year tends to see a drop in the index. Additionally, the
internals for February were also somewhat disappointing. While 15 out of the 17 manufacturing
industries at the 2-digit level clocked positive annual growth as against 14 in January, on a mom
basis 14 manufacturing sectors declined as against 8 industries in January. Growth over the month
in sectors like ‘Machinery and equipment ex-transport equipment’, ‘Wood and wood products’,
‘Textile products’, etc. dropped significantly compared to January. Mining sector growth was also
tepid at 0.6% and the index contracted by a sharp 7.1% mom. This was indicative as according to
the Core sector data, coal mining in February had declined by 5.7% yoy or (-)7.3% mom.
Electricity sector grew by 6.7%.
Weakening capital goods trends raising concerns on investment trends
Capital goods sector declined by18.4% in February from (-)18.8% in January, making it the third
consecutive month of decline. Higher interest rates, tight liquidity conditions together with
slowdown concerns are likely affecting the investment climate. The weakening trends in capital
goods have been pulling down the overall IIP growth. IIP excluding capital goods has held up
reasonably well at 8.6% in February from 9.4% in January. To a large extent, this is due to the
continued robust performance of the consumer durables sector, which expanded by 23.4% (4.9%
rise mom). In fact, barring November when growth moderated to low single digits, consumer
durables production has seen double-digit growth in FY2011 (FYTD 21.8%). The strong
performance of this sector is also evident from the continued surge in passenger car sales.
Consumer non-durables growth came in at 6.1% from 7.7% in January 2011. Basic goods and
intermediates goods sectors also recorded robust growth rates of 5.9% and 8.4%, respectively.
Weakening IIP growth notwithstanding, RBI to stay on path of policy tightening
Industrial production has witnessed a sharp slowdown in recent months, with growth coming
down from 10.4% in 1HFY11 to 5% in the October 2010-February 2011 period. However, with
other economic indicators such as PMI, car sales, etc. holding up strongly, slower economic
growth as indicated by the IIP numbers is unlikely to change the stance of monetary policy.
Further, the IIP series is based on a 1993-94 base year and of late had been losing its position as
an important decision-making parameter by itself. The Government of India is expected to shortly
release a new IIP series with 2004-05 as the base year. We think that this new series would
improve the reliability of the IIP numbers. Given the above, we continue to hold our GDP estimates
for FY2012E at 8.1%. The RBI is expected to continue with its anti-inflationary stance as it remains
worried of supply-side inflation manifesting into more generalized inflationary pressures in the
economy as wages linked to CPI inflation are adjusted higher. We thus stick to our expectations of
a 75 bps hike in the policy rates by the RBI in the course of FY2012E, with the first hike being
delivered on May 3, 2011 policy meeting.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Economy
Industrial Production
February IIP: Capital goods plays spoilsport, once again. Industrial production in
February rose by 3.6%, lower than consensus expectations of 5.2% and our
expectation of 4.5%. The volatile capital goods sector once again pulled down overall
IIP as it showed de-growth for the third consecutive month (at (-)18.4%). Consumer
durables sector, on the other hand, remained resilient, growing by 23.4%.
Manufacturing sector growth was steady at 3.5%.
'Industrial production growth remains subdued
Manufacturing sector growth has slowed down sharply from double digits in 1HFY11 to low single
digits in 2HFY11 (especially since November 2011). The sector grew at 3.5% in February from an
upward revised 3.6% in January. The lackluster growth in the manufacturing sector, to some
extent, was expected as February of any year tends to see a drop in the index. Additionally, the
internals for February were also somewhat disappointing. While 15 out of the 17 manufacturing
industries at the 2-digit level clocked positive annual growth as against 14 in January, on a mom
basis 14 manufacturing sectors declined as against 8 industries in January. Growth over the month
in sectors like ‘Machinery and equipment ex-transport equipment’, ‘Wood and wood products’,
‘Textile products’, etc. dropped significantly compared to January. Mining sector growth was also
tepid at 0.6% and the index contracted by a sharp 7.1% mom. This was indicative as according to
the Core sector data, coal mining in February had declined by 5.7% yoy or (-)7.3% mom.
Electricity sector grew by 6.7%.
Weakening capital goods trends raising concerns on investment trends
Capital goods sector declined by18.4% in February from (-)18.8% in January, making it the third
consecutive month of decline. Higher interest rates, tight liquidity conditions together with
slowdown concerns are likely affecting the investment climate. The weakening trends in capital
goods have been pulling down the overall IIP growth. IIP excluding capital goods has held up
reasonably well at 8.6% in February from 9.4% in January. To a large extent, this is due to the
continued robust performance of the consumer durables sector, which expanded by 23.4% (4.9%
rise mom). In fact, barring November when growth moderated to low single digits, consumer
durables production has seen double-digit growth in FY2011 (FYTD 21.8%). The strong
performance of this sector is also evident from the continued surge in passenger car sales.
Consumer non-durables growth came in at 6.1% from 7.7% in January 2011. Basic goods and
intermediates goods sectors also recorded robust growth rates of 5.9% and 8.4%, respectively.
Weakening IIP growth notwithstanding, RBI to stay on path of policy tightening
Industrial production has witnessed a sharp slowdown in recent months, with growth coming
down from 10.4% in 1HFY11 to 5% in the October 2010-February 2011 period. However, with
other economic indicators such as PMI, car sales, etc. holding up strongly, slower economic
growth as indicated by the IIP numbers is unlikely to change the stance of monetary policy.
Further, the IIP series is based on a 1993-94 base year and of late had been losing its position as
an important decision-making parameter by itself. The Government of India is expected to shortly
release a new IIP series with 2004-05 as the base year. We think that this new series would
improve the reliability of the IIP numbers. Given the above, we continue to hold our GDP estimates
for FY2012E at 8.1%. The RBI is expected to continue with its anti-inflationary stance as it remains
worried of supply-side inflation manifesting into more generalized inflationary pressures in the
economy as wages linked to CPI inflation are adjusted higher. We thus stick to our expectations of
a 75 bps hike in the policy rates by the RBI in the course of FY2012E, with the first hike being
delivered on May 3, 2011 policy meeting.
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