Aug IIP - Pace of incremental improvement moderates - YES Securities

IIP growth contracted at a slower pace of 8.0% YoY in Aug-20 from -10.8% YoY in Jul-20 (downwardly revised from -10.4%). Market and our estimates were -7.8% and -8.2% respectively. The improvement, on annualized basis, was broad based across mining, manufacturing and electricity sectors, supported by favorable base.

On sequential basis IIP growth contracted by 1.3% in Aug-20 vis-à-vis an expansion of 8.0% MoM in Jul-20 and as against an average increase of 0.2% MoM in August in the last 5 years. This marks the first negative print after Apr-20, since the lockdown restrictions eased at the nationwide level. Mining, manufacturing and electricity all underwent contraction, with manufacturing and electricity also registering their first negative print after Apr-20. With this print, we can cautiously state that the path to recovery will be a slow and gradual one amidst mixed signals provided by the high frequency activity indicators.

IIP by Industry: Manufacturing output drags down IIP growth

- Manufacturing sector contraction eased to 8.6% in Aug-20 from a contraction of 11.6% in Jul-20. However, on sequential basis, the sector contracted by 0.7% as against an expansion of 9.0% in Jul-20.

	* The sectors which led the contraction on sequential basis were tobacco products, paper & paper products, coke & refined petroleum products, pharma, and non-metallic mineral products.

	* The sectors which recorded positive sequential growth included motor vehicles, transport equipment, furniture, and electrical equipment.

- Mining output contracted by 9.8% YoY in Aug-20 as against a contraction of 12.8% in Jul-20. On sequential basis, the output contracted by 5.0% in Aug-20 as against an increase of 2.1% in Jul-20. Crude oil and natural gas production continued their downward spiral amid demand slowdown, closure of wells and operational issues due to monsoon.

- Electricity output eased to -1.8% YoY in Aug-20 from a contraction of 2.5% in Jul-20. Sequentially, the output declined by 2.2% in Aug-20 from an increase of 6.5% in Jul-20.

	* Electricity output contracted, on account of sharp decline in hydroelectricity generation. On the other hand, thermal and nuclear electricity generation continued to contract, albeit at a slower pace.

	* Our regional electricity demand heatmap indicates that the electricity consumption in Northern and Western Region declined sequentially.

IIP by Use Based: Consumption sector underperforms

- Consumption goods production printed at -6.2% YoY in Aug-20, an improvement from -8.8%YoY in Jul-20. However, on sequential basis, the sector contracted by 0.8% - first contraction in four months - from an increase of 4.2% MoM in Jul-20. o Within the segment, consumer non-durables contracted by 6.4% MoM in Aug-20 after a contraction of 5.4%MoM in Jul-20. On the other hand, consumer durables increased by 9.1% MoM.

- Investment goods production printed at -6.4% YoY in Aug-20 improving from - 12.9% YoY in Jul-20. On sequential basis, the sector increased by 1.4% after posting an expansion of 11.8% MoM in Jul-20.

	* The improvement was led by capital goods production which increased by 5.8% MoM following an expansion of 11.1% MoM in Jul-20. Infrastructure & construction goods segment posted a slight contraction of 0.2% after an increase of 12.1% in Jul-20.

	* Capital goods production led investment growth bodes well for the manufacturing sector which in turn has ripple effects on demand side indicators like employment and private consumption.

- Primary goods production disappointed on both annualized and sequential basis as both mining and electricity output registered a contraction during the month.

Our take

While it is early to be convinced about the recently observed moderating trend in daily COVID infections in the country, easing of localized lockdowns has allowed for gradual resumption of activities. This is suggestive in today's IIP print which has shown modest recovery for yet another month on annualized basis, supported by favorable base at the margin. However, the recovery is not yet deep rooted or broad based with sector and industry wise variations still existing. We believe that while the supply side drivers of the economy, like the capital goods segment, are inching towards pre-COVID levels, consumer demand side revival as reflected through consumer non-durables segment, still remains a laggard. Salary cuts, job losses, economic uncertainty at the global and domestic level is likely to weigh on consumers discretionary spending behavior. Incremental improvement in consumption can be expected in the coming months, on account of festive demand, however the likelihood of demand sustenance remains low given current set of fiscal and monetary parameters. Overall, we expect India's GDP growth to nose-dive to -8.5% in FY21.

Source : Equity Bulls

Keywords