India: Industrial production surprises on the upside : Nomura

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 Industrial production (IP) growth rose to 5.0% y-o-y in February from 2.8% in January (earlier: 2.6%), above expectations, led by consumer non-durables and the mining sectors.  The strong growth in capital goods output, juxtaposed with the recent growth in imports, excluding oil and gold, and the pick-up in new investment projects suggests a steady improvement in investment activity.  Today's IP data indicate that momentum in the industrial sector is gradually improving. We expect growth to pick up through 2015 on de-bottlenecking of projects, improving sentiment, lower inflation and lower interest rates. IP growth rose to 5.0% y-o-y in February from an upwardly revised 2.8% y-o-y in January (previously: 2.6%) and higher than expectations (Consensus: 3.3%; Nomura: 3.0%, Figure 1). On a 3-month moving average basis, IP rose 3.6% y-o-y in February, from 3.3% in January (H2 2014 average: 1.6% y-o-y), suggesting the industrial sector is recovering at a gradual pace. Both electricity and mining growth picked up compared with January, reflecting an easing of supply constraints in the economy. Manufacturing sector output, rose 5.2% y-o-y in February, from 3.4% in January, led by higher growth in sub-groups such as apparel, leather, metal and plastic products. On the demand side, capital goods output growth remained strong (8.8% y-o-y) suggesting a steady improvement in investment activity. This is consistent with the recent growth in imports, excluding oil and gold, higher medium and heavy commercial vehicle production and the pick-up in new investment projects announced (see: India: New investments improve in FY15, 6 April 2015). By contrast, demand for consumer durables remained tepid, at -3.4% y-o-y. However, the durable data must be taken with a pinch of salt as the sector has been facing data issues (the impact from the shutdown of a telephone equipment firm). Excluding the corresponding radio, TV & communication equipment segment, IP rose 6.6% y-o-y compared with 4.6% in January and this is consistent with a gradually recovering industrial cycle (Figure 2). Outlook: Overall, today's IP data indicate that momentum in the industrial sector is gradually improving. High frequency indicators such as aviation passenger traffic, passenger car demand and diesel consumption indicate green shoots of a stable and steady recovery in domestic demand (Figure 3). We expect the industrial recovery to continue, supported by increased public investment in infrastructure, a faster revival of stalled projects, easier financial conditions and lower input costs, which should boost corporate profit margins. Although rural consumer demand may get hit in the coming quarters owing to lower agricultural income on crop damage because of unseasonal rains, the impact is likely to be temporary and more than offset by the positive impact of lower inflation and easier financial conditions. All said, we expect the recovery to be gradual (not V shaped) owing to balance-sheet constraints for the banks and infrastructure sectors, the lack of room for an aggressive monetary easing and weak global demand.