IIP growth slows as manufacturing contracts - Cholamandalam Securities

For the month of August 2013, industrial output (IIP-index of industrial production) rose by 0.6%YoY as against market expectations of growth at 2.0%. July IIP growth numbers were further revised upwards to (2.8%YoY). On a use-basis, capital goods (-2.0%YoY) and consumer durables (-7.62%) led the decline, while on a sector basis – Manufacturing and Mining contracted. Electricity grew sharply by 7.2%YoY driven by improvements in hydro generation facilities. The index reading was reported at 165.7 (provisional) as against 171.7 for August 2013 and 164.7 for August 2012.

- Core sectors grew at nine-month high of 3.75%YoY in August 2013 as against 6.10%YoY for August 2012. Steel production increased (4.30%YoY), crude contracted (-1.51%YoY) while natural gas continued its decline (33 straight months) by (-16.11%YoY). Other sectors petroleum (4.88%YoY), cement (5.45%YoY),Fertilizers (1.69%YoY) witnessed upside, whilst Coal grew sharply (5.46%YoY)

- On a Sector basis - Mining contracted (-0.2%YoY). Manufacturing was down (-0.1%YoY) with 14 of 22 industries in the manufacturing segment showing negative growth. The downslide was led by an (-21.7%YoY) drop in Radio, TV and communication equipment followed by Furniture (-21.6%YoY) and Machinery (-15.5%YoY). Key contributors on the positive side included Electrical Machinery (26.0%YoY) and wearing apparel; dressing and dyeing of fur (25.5%YoY).

- On a Use-basis- Capital goods contracted (-2.0%YoY); led by high negative growth in Generator/Alternator (-72.7%YoY) and earth moving machinery (-45.8%YoY). Consumer goods contracted (-0.8%YoY) while basic goods grew (1.5%YoY). Intermediate goods saw an uptick of (3.6%YoY).

Outlook: Industrial output data, along with PMI, continues to reflect weakness in the underlying economic activity. Capital goods production, a barometer for investments slid reflecting weak investment sentiment, whilst decline in consumer goods was led by durables owing to weaker growth in discretionary purchases. However, good monsoon and festive season may help revive consumer demand, while a robust growth in exports (11.15%YoY) for September 2013 and going forward this trend is likely to continue, which will have a positive impact on manufacturing. This apart, support from policy initiatives on new projects and the ~50% of plan expenditure of FY14 released by government may help revive investment demand in 2HFY14. However, inflation the key nominal anchor of RBI policy remains above acceptable level is expected weigh on policy decision.

Source : Equity Bulls

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