Industrial Production - May IIP: -1.6%, to remain muted, diminishes rate cut hope - Emkay

IIP growth contracts sharply, lower than expectations

The Index of Industrial Production (IIP) for May 2013 came in sharply lower at -1.6%YoY as against the lower revised 1.9% for Apr (2.3% provisional) and the consensus at 1.5%. The 2.2%MoM seasonally adjusted decline indicates a sharper deterioration than indicated by the headline contraction.

Mining, manufacturing and electricity grew at -5.7%YoY, -2% and 6.2%, respectively. While contraction in mining and growth in electricity remain in line with expectations, higher than expected decline in manufacturing reflects overall weakness in production.

IIP growth to remain subdued, scope for rate cut diminishes

Leading indicators weakens our hope of meaningful recovery in industrial production:

- Contraction in sales of domestic cars (-9%YoY), commercial vehicles (-13.5%) and motorcycles (-9.2%)

- High inventory levels followed by production cuts announced by Maruti Suzuki and Mahindra & Mahindra imply lower future production

- Power generation data for June shows a sharp MoM contraction (~10%) which will imply a YoY contraction in Electricity data for Jun IIP

- Our internal research suggests mining performance in June was a tad lower in wake of an early monsoon. The monsoon season would continue to witness subdued Mining activity

- Leading indicators for Q1FY14 corporate results suggest continued deceleration in sales growth and contraction in profits.

- We expect June 2013 IIP growth to remain muted. The recovery would remain gradual and consumption led, driven by election related spending.

- Scope for rate cut diminishes: The combination of contracting IIP and unrelenting CPI inflation which increased to 9.8%YoY in Jun 2013 (9.3% in May) will pose significant constraint for RBI in its pro-growth stance. We are yet to see the pass through impact of sharply depreciated INR, further increase in prices of fuel, coal and power. In addition, potential risk of high volatility in capital flows remains. Hence, the probability of rate easing has completely diminished.

Source : Equity Bulls

Keywords