Core sector performance in FY22 to be driven by the steel, cement and the power sectors

Mr.Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research on Core Sector Performance April 2021

"Given the effect of the second wave of Covid and the lockdown restrictions initiated by several states in April 2021, a slowdown in the core sector performance was already anticipated. Unlike in previous months, we haven't analysed the data on a YoY basis since the base factor has made such an analysis not meaningful given the complete national lockdown in April 2020. On a sequential basis, the index of eight core industries has declined by 15.1% in April which is partly due to the seasonal factor and partly due to the Covid driven disruption. Our analysis of the core index over 3 yrs (excluding 2020) indicates an average seasonal decline of 10.5% in April vs March and therefore, the additional decline can be attributed to Covid 2.0.

Coal production had seen a high of 739.6 million tonnes in FY19 and has contracted subsequently in FY20 and FY21 due to the economic slowdown and the Covid impact. Unless there is a very strong industrial recovery from Q2 FY22, coal output is likely to remain tepid in the current year. Given the structural constraints, the domestic production of both crude oil and natural gas have continued to record a steady decline over the last few years. While the oil refinery output had seen a rapid decline in the last fiscal which also coincided with a drop in global fuel demand, it has seen a steady pick up in H2FY21 along with a recovery in global demand. The fertiliser production has been an outlier with healthy demand in both FY20 and FY21 on the back of robust agricultural growth and with a favourable monsoon forecast in FY22 as well, such a trend is expected to sustain. Both steel and cement production have seen a V shaped recovery in FY21 given the government's focus on capital expenditure and infrastructure development and while there may be a temporary dip in Q1 on account of the second wave, it is likely to return on the recovery path from H2FY22. Although power generation has taken a hit in FY21 due to a slump in both industrial and commercial demand, it has been largely offset by a healthy growth in residential demand and rural electrification leading to only a 0.5% contraction over FY20.

We believe that the core sector performance in FY22 will be driven by the steel, cement and the power sectors that will continue to benefit from the focus on infrastructure growth. With the second wave tapering down by Q1FY22, the overall core sector output has the potential to grow by 7%-9% for the full year.

Source : Equity Bulls

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