FEBRUARY IIP: GREW BY 3.6% :Kotak Sec,

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FEBRUARY IIP: GREW BY 3.6%
Growth came on a larger base (February 2010 IIP growth
was 15.1%)!!
On a MoM seasonally adjusted basis, growth in February was -0.2% against
that of (1.1%) in January and (-1.6%) in December. The cumulative growth
for the period April- February, 2010-11 stands at 7.8% over the
corresponding period of the previous year. On 4MMA basis IIP growth
slowed to 3.4% from the peak of 16.4% in March 2010.
Seasonally adjusted IIP growth indicates sharp volatility attributed to capital
goods number. We believe that the best of IIP in growth numbers is well
behind us and going forward for next few months IIP numbers would
continue to edge lower and may disappoint if the economic growth
moderates from here on due to high base effect. We continue to expect the
IIP growth for the fiscal to be less than 8%, reflecting around 8 - 8.5% GDP
growth for the fiscal.

However, the worrying sign is that fixed capital formation has been
sluggish and consumption has been significantly strong, directing more
pressure on inflation both structurally and cyclically. This has made task of
RBI difficult. This is because, if interest rates rise significantly from here on
then consumption may slow down but capacity creation would slow down
as well, which would result in high inflation whenever demand picks up or
rates come down.
IIP peaked in March 2010, has come off below its long term trend level, going forward
we expect moderate improvements in IIP, as high base effect would keep the
benchmark lower until May. In our view, the economy is likely to continue on its
growth trajectory of over 8% GDP growth, and IIP shall be less than 8% for the fiscal.
With low base effect benefits behind us, high base effect would continue to put
pressure on y-o-y IIP growth numbers for next few months. IIP growth from Jan-May
2010 averaged over 15% last year.
On a 3mma, IIP slowed to 3.3% from 3.4% in January 2011 and double digit figures
observed in late 2009. The main encouraging growth came from consumer durables
which grew by 23.4% against a significantly high base of 29.1% in February 2010.
Inflation data for the month of February to be released on Friday would set the tone
of RBI's hawkishness. We expect WPI inflation for the month of February to be about
8%. We expect RBI to continue with its tightening monetary policy stance and raise
rates by 25 bps.
Key highlights
The sectoral growth (use-based classification) has been as under:
n Basic goods: 5.9% (against 7.6% in January)
n Capital goods: -18.4% (against -18.8% in January)
n Intermediate goods: 8.4% (against 8.3% in January)
n Consumer goods: 11.1% (against 11.9% in January)
n Consumer durables: 23.4% (against 23.3% in January)
n Consumer non-durables: 6.1% (against 7.7% in January)


IIP for the Mining, Manufacturing and Electricity sectors for the month of February
2011 stand at 204.5, 373.9, and 243.7 respectively, with the corresponding growth
rates of 0.6%, 3.5% and 6.7% as compared to February 2010. The cumulative
growth during April- February, 2010-11 over the corresponding period of 2009-10 in
these three sectors have been 6.5%, 8.1% and 5.4% respectively, which moved the
overall growth in the General Index to 7.8%.


In terms of industries, fifteen out of the seventeen industry groups have shown positive
growth during the month of February 2011 as compared to the corresponding
month of the previous year. The industry groups 'Jute and other vegetable fibre Textiles
(except cotton)' have shown the highest growth of 142.9%, followed by 34.6%
in 'Other Manufacturing Industries'. On the other hand, the industry groups 'Wood
and Wood Products; Furniture and Fixtures' have shown a negative growth of 42.3%
followed by 16.8% in 'Machinery and Equipment other than Transport equipment'.
As per Use-based classification, the Sectoral growth rates in February 2011 over February
2010 are 5.9% in Basic goods, (-) 18.4% in Capital goods and 8.4% in Intermediate
goods. The Consumer durables and Consumer non-durables have recorded
growth of 23.4% and 6.1% respectively, with the overall growth in Consumer goods
being 11.1%.



Some of the important items responsible for the current month's negative growth in
the capital goods include 'Insulated cables/wires all kinds' [(-) 82.6%], 'Material
handling equipment in cl. wagon' [(-) 49.4%], 'Hydraulic machine/hydraulic cylinders'
[(-) 42.1%] and 'Electric motors' [(-) 37.9%]. However, some important items
of the Capital goods are also showing significant positive growth. These are: 'Laboratory
and scientific instruments' (86.4%), 'Process control instruments' (85.2%),
'Ship building and repair' (42.7%) and 'Boilers' (36.6%).



Though capital goods are showing negative growth, there are other important items
which are showing highly positive growth during the month; such as : 'Sacking'
(152.3%), 'Hessian' (130.5%), 'Telephone instruments' (111.0%), 'Railway materials'
(73.5%), 'Writing instruments' (72.9%), 'Monocrotophos' (72.8%), 'Alarm time
pieces' (60.1%) and 'Sulpha drugs' (52.6%).



Seasonally adjusted IIP growth indicates sharp volatility attributed to capital goods
number. We believe that the best of IIP in growth numbers is well behind us and
going forward for next few months IIP numbers would continue to edge lower and
may disappoint if the economic growth moderates from here on due to high base
effect. We continue to expect the IIP growth for the fiscal to be less than 8%, reflecting
close to 8 - 8.5% GDP growth for the fiscal.
However, the worrying sign is that fixed capital formation has been sluggish and
consumption has been significantly strong, directing more pressure on inflation both
structurally and cyclically. Making the task of RBI difficult, as if interest rates rise significantly
from here on then consumption may slow down but capacity creation
would slow down as well, which would result in high inflation whenever demand
picks up or rates come down.