IIP surprises, possible overstated - Emkay

July IIP higher than expectations

The Index of Industrial Production (IIP) for July 2013 came in at 2.6%, significantly higher than consensus estimates at -0.8%. The data is in line with the eight core industries data (38% weight in IIP) which grew at 3.1% in Jul. The month marked 4.4% m-o-m seasonally adjusted rise in activity, highest since Oct 2012.

Apr-Jul industrial growth marks a contraction of 0.2% y-o-y.

Mining, manufacturing and electricity grew -2.3% y-o-y, 3% and 5.2% respectively. While the stronger than expected manufacturing growth has pulled up the IIP number, it seems to be overstated given that it has come from an abnormal 336%y-o-y growth for 'cable, rubber insulated'. This has also boosted capital goods growth to 15.6% y-o-y. IIP ex-Capital goods grew a meager 0.9% y-o-y.

Sectoral performance - Manufacturing pulls up overall production

- Eleven of the 22 industries in manufacturing witnessed positive growth. 10 industries (50.6% of the total weight of manufacturing) grew slower than last year indicating the continued slowdown.

- Investment sentiment remains devoid of any improvement with persistent contraction in heavy manufacturing industries such as machinery and equipment, motor vehicles, trailers and metal products.

- The seasonal downplay in wake of monsoon and mining bans in several states have led to continued contraction in mining (-2.3%)

User-based - Investment cycle still remains weak

- Growth rates stood as follows: Capital goods (15.6%), Basic goods (1.7%), Intermediate goods (2.4%), and Consumer goods (-0.9%) [durables and nondurables at -9.3% and 6.8%, respectively].

- Capital goods growth at 15.6%, highest in the last two years, seems to be an aberration amid significant volatility. Items such as 'cable, rubber insulated' have been a perennial source of concern with regards to data consistency. Q1FY14 results for capital goods marked a revenue decline of 7% arising from poor execution and demand slump in industrial equipments. Emkay ECG sector posted a decline in net profits for a fourth consecutive quarter.

- Major other items in capital goods (boilers, sugar machinery, earth-moving machinery and plastic machinery) continued to exhibit significant contraction. Hence in our view, notwithstanding the strong capital goods growth, the investment cycle still remains weak.

- Positive growth in basic goods reflects the growth seen in core items such as steel (7%)

- Attempts to curb imports (viz. gold and other items) reflected in contraction of consumer durables (9.3%) largely led by items such as gems and jewelry, air conditions, telephone instruments. Conversely, policy incentives to encourage exports are reflected in stronger performance of non-durables contributed by apparels, leather garments and food items

Substantial recovery in IIP growth still away

- We do not expect a meaningful recovery in industrial production soon with leading indicators continuing to be weak:

- Commercial vehicle sales contracted 23.1%, truck and bus sales contracted 38.2% whereas motorcycle sales rose a meager 3.8% in August. Strong growth seen in domestic car sales (15.4%) was on the back of robust sales growth of Maruti Suzuki (51.6%) tracking a low production base a year ago.

- Mining activity could pick up marginally going ahead with the withdrawal of monsoon. However, any improvement in mining production tracking the removal of mining bans levied in states such as Karnataka and Goa would only be gradual

- Power generation data for August indicates a marginal m-o-m contraction; however, the data implies a reasonable y-o-y growth in Electricity data for August

FY14E GDP at 4.5%; another year with almost flat industrial production: We do not expect any significant improvement in the Aug IIP data. Despite a weak base last year, the insidious slowdown in growth sentiment has kept production numbers muted throughout this fiscal. Given a) good monsoon, b) an expansionary stance evident in Government spending already (expenditure growing at 19.2%YoY; higher than 16.4% budgeted) and c) election related spending going ahead; H2FY14 is likely to see improved consumption led production. We expect FY14E GDP to be around 4.5%, with another fiscal year witnessing an almost flat industrial production

No scope for rate easing: Whilst GDP numbers remain muted (Q1FY14 at 4.4%); a) high CPI (Aug at 9.5%) b) expected inch up in CAD/GDP ratio (Q1FY14E at 5.3-5.5%) evident from the further decline in net exports/ GDP seen in GDP data c) expected pass through of higher global crude oil price d) a weak INR and e) the new RBI Governor's primary focus on lower inflation constraint the room for any monetary easing. Importantly, several import restrictions in combination with high Government spending will flare up inflationary pressures and compound the impact of above mentioned factors. As INR stability and attracting capital flows take center-stage, we expect interest rates to remain elevated.

Source : Equity Bulls

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