Industrial Production - Nov IIP at -2.1%, bias towards elevated rates stay - Emkay

Nov IIP contracts 2.1%; significantly lower than consensus

IIP growth at -2.1% y-o-y is lower than consensus at +1% and -1.6% in Oct. The IIP data marks a sharp contrast to the eight core industries data that grew 1.7% for Nov. In addition to the headline contraction, the index declined 2.1% m-o-m on seasonally adjusted basis indicating a significant slowdown in the activity momentum.

Mining & electricity grew 1% & 6.3% respectively whereas manufacturing contracted a steep 3.5%. Despite a favorable base, the overall IIP number was weak due to a) weak consumption demand post festive season specifically in consumer durable items and b) continuing slack in investments.

Dec IIP likely to be negative

Tracking muted year-end demand and several lead indicators, Dec 2013 IIP data would likely be negative.

- Dec witnessed continued deceleration in auto sales. Commercial vehicle and passenger vehicle sales contracted 25.5% YoY & 10% respectively. Two wheeler sales grew slower at 2.3% in line with the slowdown seen in recent non-food credit growth. For Nov, vehicle loans grew 20.1%, slower than 24.3% during Apr-Oct 2013

- Manufacturing PMI in Dec fell to 50.7 compared to 51.3 in Nov indicating continued subdued production activity

- Power generation data for December suggests a healthy 6.5% m-o-m expansion; indicating around 6.7% y-o-y growth in Electricity for Dec IIP

Outlook: Bias towards elevated interest rates

While the production numbers have remained muted so far; revival in exports, high government spending and strong agri sector growth may indicate some consumption based upturn from the slack in the core manufacturing going ahead. Outlook on investment cycle still remains feeble.

Our view on interest rates factors in a) elevated CPI and WPI levels b) expected pick-up in core inflation given weak manufacturing margins c) high Government spending fueling consumption d) probable rural demand revival tracking election related spending and good monsoon e) weakening bias on the INR towards 63 per dollar given the US tapering and f) expected rise in US rates. Hence, while we acknowledge the weak growth numbers, the potential upside risks to inflation and vulnerability on the INR front outweigh our bias towards elevated interest rates.

Hence, we are of the view that rate-tightening cycle has not got over in India yet and we expect another 25bp hike in repo rate until the fiscal year end.

Source : Equity Bulls

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