India Economy Core infrastructure - Sharp recovery in core, may not be sustainable - Anand Rathi Financial Services

Core infrastructure bounced back in May15, growing 4.4%. All the sectors, excluding natural gas, grew in the month. While cement, refinery, crude and electricity turned around, coal continued buoyant. The figures augur well for a pick-up in further growth. We feel, these are initial signs of a capex cycle pick-up, which is likely to be slow-paced. Coal, steel and cement growth will likely outpace other sectors.

Performance: Core infrastructure turned around to grow 4.4% in May15 (-0.4% in Apr15). The highest growth came in coal and refinery products, both 7.8%. Electricity growth turned around in May15 to 5.5% (-1.1% in Apr15). While steel growth accelerated (2.6%), cement (2.5%), fertilsers (1.3%) and crude oil (0.8%) turned around. Natural gas was the only sector to contract (-3.1%). The core industries? performance in 2M FY16 (2.1%) has been less than half of 2M FY15 (4.7%).

Assessment: The index hit an all-time high in May15, which led to the commendable figures. Despite an unfavorable base, the growth was due to a broad-based recovery in the sectors. The sharp turnaround in refinery products stands out, which was an excellent performance on an unfavorable base. Growth vaulted to a six-month high, coinciding with the highest growth in a segment in May15. Above 5% growth in the electricity sector is reassuring; in this sector growth had been slipping for the two months prior. Fertilizers continued volatile, alternating between growth and contraction every month. The coal sector maintained a strong and steady performance.

Outlook: Coal, which already exhibits good growth figures, would accelerate with further clarity concerning the coal blocks besides the coal blocks which have already been cleared. Steel and fertilsers might continue to report low growth figures. We are however concerned about cement and electricity growth in the next two-three months. Cement growth likely to drop next month due to the heavy rains in June. In addition, both the sectors reported double-digit grown in Jun-Aug of last year. Recovery in natural gas sector also looks distant.

Recommendations: India's economy has improved considerably in the past 12-18 months. This is visible in the GDP growth data and also high-frequency data like IIP and core sector data. We feel that core sector growth is likely to remain low in the next few months. However since the long term correlation between core and IIP has broken down, we might still see good figures in IIP. We feel these are initial signs of a capex cycle pick-up, but the recovery is likely to be slow-paced. We continue to like roads, railways in infrastructure and defence.

Source : Equity Bulls

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