Industrial Production - Weak rupee to override weak growth - Anand Rathi

Despite a favourable base, IIP in Apr'13 grew 2% on account of weak demand for discretionary items and low power production. Despite subdued growth, we expect the RBI to keep policy rates unchanged in the Jun'13 policy due to a sharp fall in rupee and widening trade deficit. However, RBI may surprise with a 50bps cut in repo rate in the Jul'13 policy, if the rupee comes back to pre-May'13 levels.

IIP below expectations. IIP grew 2% in Apr'13, which was lower than our and consensus expectations of 2.4%. For Mar'13, however, IIP was revised upward to 3.4% from 2.5% earlier.

Electricity, mining drag down IIP growth. Electricity production grew merely 0.7% in Apr'13, following 3.5% growth in Mar'13. Mining production continued to contract for the seventh consecutive month in Apr'13 (-3%). Also, manufacturing production decelerated to 2.8% in Apr'13 from 4.2% in Mar'13.

Capital goods production remains subdued. Despite a strong favourable base effect, capital goods production fell sharply to 1% in Apr'13. It had fallen 21.5% in Apr'12.

Electrical machinery shows sharp traction. Electrical machinery, which has 2% weight in IIP, grew 25.4% in Apr'13, following 56.6% growth in Mar'13. This category has been growing strongly with an average growth of ~50% in the past six months. Cable & rubber insulated production and conductor & aluminium production are the two sub-categories under electric machinery that have been showing sharp pick up in growth since Oct'12.

Consumer durables in the red. Consumer durables production (-8.3%) contracted for the fifth consecutive month in Apr'13, to a four-year low. On the other hand, non-durable production bounced back in Apr'13 with 12.3% growth, the highest in the past 16-months. Overall, consumer goods production grew 2.8% in Apr'13, the highest in past six months.

Industry assessment and outlook. The subdued industrial production growth in Apr'13 defies any hope of a meaningful growth recovery in FY14. The consumer durables production growth falling to levels seen post the Lehman Brothers' crisis indicates weakening demand for discretionary items. A host of infrastructural bottlenecks related to power shortages, mining ban in many states and delays in commissioning projects are key headwinds for recovery in industrial production. We expect IIP to grow at low single digit in 1HFY14, followed by gradual recovery in 2HFY14.

Policy rate outlook. With 75bps cut in the repo rate since Jan'13 so far, RBI has frontloaded monetary easing. The same, however, has not transmitted to banks' lending rate. The sharp depreciation of the rupee since May'13 would offset impact of low domestic inflation by high imported inflation, at least in the short term. Therefore, we expect RBI to be in a wait-and-watch mode in the Jun'13 policy. However, the central bank may cut repo rate 25-50bps in the Jul'13 policy, depending upon the rupee movements.

Source : Equity Bulls

Keywords