Exports boost factory output - Cholamandalam Securities

For the month of July 2013, industrial output (IIP-index of industrial production) rose by 2.6% YoY as against market expectations of contraction at 0.8%. June IIP growth numbers were further revised upwards to (-1.9%YoY). On a use-basis, capital goods increased sharply (15.6%YoY) while on a sector basis - Manufacturing grew (3.0%YoY) driven largely by momentum in merchandise exports, which grew by 11.6%YoY in July and 13%YoY in August 2013. Electricity growth (5.2%YoY) rebounded in July. The index reading was reported at 171.5 (provisional) as against 164.3 for June 2013 and 167.1 for July 2012.

- Output growth in core industries was reported at 3.1%YoY in July 2013 as against 4.5%YoY for July 2012. Coal production edged up (1.1%YoY), crude saw a dip of (2.3%YoY) while natural gas continued its decline (32 straight months) by (16.0%YoY). Other sectors petroleum (5.0%YoY), cement (0.8%YoY), Fertilizers (0.4%YoY) witnessed upside, whilst steel grew sharply (7.0%YoY) to 7-month high, owing to diversion away from imported to domestic steel on the back of weak rupee, whilst new capacities come up with SAIL and Tata Steel also helped.

- On a Sector basis - Mining contracted (2.3%YoY). Manufacturing grew (3%YoY) with 11 of 22 industries in the manufacturing segment showing positive growth. Key contributors on the positive side included wearing apparel; dressing and dyeing of fur (44.0%YoY), Luggage and leather products (16.5%), Chemical and Chemical products (4.3%YoY). Downslide was witnessed in Furniture (11.3%YoY).

- On a Use-basis- Capital goods grew sharply (15.6%YoY); led by high positive growth in electrical machinery (83.6% YoY). Consumer goods contracted 0.8%YoY, owing to decline in durables (9.3%YoY). Intermediate goods showed a marginal uptick 2.3%YoY.

Outlook

Industrial output rebounded, led by turnaround in manufacturing driven by export oriented industries. The lagged effect of rupee depreciation, helped in sharp growth in exports for July and August 2013 and going forward this trend is likely to continue, which will have a positive impact on manufacturing. However, a sustained revival in industrial activity will depend on improvement in domestic demand and pick up in corporate investments. While, a normal monsoon may help push up consumption growth, project approvals given by CCI adding up to INR 1.78tn, may help revive investment spending in 2HFY14. This apart, a weakening rupee due to likely Fed tapering of QE and geopolitical issues in Gulf offer little room for RBI to reverse the recent tightening measures which might impact growth negatively.

Source : Equity Bulls

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